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Original caption: The Turkish lira plummeted more than 16% after laying off three central bank governors in two years. Multinational central banks raised interest rates to resist currency depreciation and inflation. Source: China Times
This reporter (chinatimes.net.cn) reporter Liu Jia reports from Beijing
With the removal of the governor of the Central Bank of Turkey, the exchange rate of the Turkish lira against the US dollar fell below 8 to 1.
Earlier, in response to inflation, the Central Bank of Turkey announced on March 18 that it would raise interest rates by 200 basis points to 19%, far exceeding market expectations. However, the country’s president, Erdogan, who advocates keeping interest rates low, abruptly dismissed the governor of his country’s central bank, Abar, in the early hours of the 20th.
The move shocked the market. The lira plunged more than 16% in the early hours of the 22nd, falling to a low of 8,485 lira per US dollar, which was close to the lowest level in history. four-month term of the former president.
Rabobank also stated that in order to abandon your cautiously optimistic view of the Turkish lira, you must assume that Turkey’s relaxation cycle may start earlier and faster than previously thought.
The lira sinks against the US dollar
In the early morning of March 20 local time, the Turkish government issued an official announcement signed by President Erdogan, announcing the appointment of Kafcioglu as the new governor of the Central Bank of Turkey, and the former governor Abar was removed from office.
This is the third time Erdogan has suddenly replaced the central bank governor since 2019. The reasons for the removal of the first three governors are also different.
In 2019, the then president was fired because the interest rate did not drop fast enough; his successor Murat Uysar was fired after the exchange rate of the Turkish lira hit a record low. Abar, who had just been deposed, angered Erdogan by his frequent hikes in interest rates.
Why does Abbar raise interest rates frequently?
Some analysts said it was mainly due to the drag from the Turkish currency crisis in 2018. In 2018, the Fed’s interest rate hike is reported to have dragged down the Turkish economy. Under the upward trend of the US dollar, the country faced problems such as capital outflows and devaluation of the local currency. In order to keep the lira stable, it had to raise interest rates significantly. As of February this year, Turkey’s inflation rate was still at 15%, more than three times the target set by the country’s central bank.
To curb inflation, Abar frequently introduced policies to increase interest rates. According to statistics, after taking office in November 2020, the Central Bank of Turkey raised the benchmark interest rate from 10.25% to 15%; in December 2020, it raised interest rates to 17%; On March 18 of this year, it raised interest rates. by 200 basis points to 19%.
However, President Erdogan advocated keeping interest rates low to control inflation, saying that high interest rates would not allow the country to develop. And Abbar’s approach obviously works against that.
In the more than four months that Abar served as governor of the Central Bank of Turkey, the central bank has raised the benchmark interest rate by 875 basis points, and Turkey’s exchange rate against the US dollar has also risen sharply.
Following news of Abbar’s demotion, the lira’s exchange rate against the US dollar plummeted, giving up most of the former president’s four-month term.
Kafcioglu, the new governor who succeeded Abar, said on the 21st that he would effectively use the tools of monetary policy to achieve price stability. He also said that the central bank’s interest rate decision-making meeting will be held as scheduled.
Although the new governor stepped forward to appease, this personnel change in Turkey may cause another blow to the prestige and credibility of the central bank, causing the Turkish lira to depreciate sharply.
Christian Maggio, a strategist at TD Securities, believes that the lira will depreciate between 10% and 15% in the coming days. “This reform shows Turkey’s capricious political decisions, especially regarding monetary issues (and risks).”
World central banks move before the camera
On March 11, the United States, the world’s only super-economy, passed an economic stimulus bill of up to $ 1.9 trillion. However, in less than a week, many emerging economies could no longer bear the depreciation and inflation of their currencies caused by the US dollar, and announced increases in interest rates.
The Central Bank of Brazil announced on March 17 that it would raise the benchmark interest rate by 75 basis points to 2.75%, beating market expectations of a 50 basis point increase. This is the first interest rate hike in Brazil since July 2015.
On the night of March 18, the Central Bank of Turkey announced a rate hike. The Central Bank of Turkey raised the key interest rate by 200 basis points to 19%. The Central Bank of Turkey stated that, taking into account the upward risks of inflation, it has decided to implement a strong austerity policy in advance and will resolutely maintain the austerity policy for a longer period of time. “If necessary, monetary policy will tighten even more.”
The Central Bank of Russia announced on March 19 that it would increase the benchmark interest rate by 25 basis points to 4.5%. This is the first time that Russia has raised the benchmark interest rate since the end of 2018.
In addition, market expectations of interest rate hikes are increasing in countries such as India, South Korea, Malaysia and Thailand.
Compared with the monetary policies of emerging markets, the major developed economies have chosen to maintain ultra-flexible monetary policies.
The Bank of Japan announced on the 19th that it will continue to keep short-term interest rates at minus 0.1% and buy long-term government bonds to keep long-term interest rates around zero. Bank of Japan Governor Haruhiko Kuroda said that to achieve the 2% inflation target, the central bank will continue to implement strong easing policies.
The Bank of England said on the 18th that due to the uncertainty of the British economy under the epidemic, it decided to keep the benchmark interest rate at a record low of 0.1%, maintaining a bond purchase plan of 895 billion euros. pounds.
The Bank of Australia also decided in early March to keep the benchmark interest rate unchanged at a record low of 0.1%. Reserve Bank of Australia Governor Philip Lowe previously stated that the current low interest rates will hold until at least 2024.
It is worth noting that the yield on the 10-year US Treasury has risen steadily in recent weeks. The market expects the Fed to be forced to raise interest rates to curb inflation caused by unprecedented monetary and fiscal stimulus measures.
On the other hand, my country’s central bank has implemented adequate monetary policies, the RMB exchange rate has remained stable, and the economy is recovering beyond expectations.
Yi Gang, Governor of the People’s Bank of China, said yesterday at the Round Table of the High-Level Forum on China Development that my country has a lot of room to control monetary policy. “China’s monetary policy has always been within the normal range, with sufficient tools and appropriate interest rates. We need to assess and make good use of normal monetary policy space to maintain policy continuity, stability and sustainability.” To some extent, this dispels market concerns about the rapid tightening of monetary policy.
But we must also prevent and strictly control external financial risks. Wang Yiming, a newly appointed member of the Monetary Policy Committee of the People’s Bank of China and vice chairman of the China Center for International Economic Exchange, pointed out yesterday at the China High-Level Development Forum that the US dollar is the most important in the world. . reserve currency, and the Federal Reserve’s zero interest rate (0-0.25%) and unlimited easing policies have exacerbated global excess liquidity. Large-scale short-term capital inflows into emerging markets have raised the local currency exchange rate. If the US economy recovers more than expected and the Fed tightens monetary policy, it may again lead to large-scale capital outflows from emerging markets, sharp declines in asset prices, and market turmoil. financial
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