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Original caption: Turkey’s exchange rate fell sharply, the stock market fired the central bank governor’s wick and “put the pot back”
Securities Times Reporter Wu Jiaming
Inflation is arguably the hottest topic in the global capital market recently. However, before the Fed started to get nervous, some emerging markets began to “panic.” On the 22nd local time, Turkey suffered severe turmoil in the stock, bond and currency markets.
Is the Turkish central bank too unreliable?
Last week, the Central Bank of Turkey announced that it would increase the benchmark interest rate to 19% in response to rising inflation. Data shows that, as of February this year, Turkey’s annualized inflation rate has risen to 15.6%. However, Turkish President Erdogan has been calling on the country’s central bank to implement low interest rates to help the country’s economy recover from the impact of the new corona epidemic. Therefore, Turkish President Erdogan ordered the removal of the Central Bank Governor Naji Abar, the twentieth local time, and the appointment of Shahapu Kafcioglu as the new governor.
Even if the president objected, Najib Abar had already put the country on the path of raising interest rates. According to statistics, during Najib Abar’s tenure, the Central Bank of Turkey raised interest rates substantially and the benchmark interest rate rose by 875 basis points. Just when the removal of Najib Abar was announced, he raised the quasi-interest rate again by 200 basis points and made such a huge rate hike. Najib Abar has only been in office for 4 months.
Jason Tuvey, Senior Emerging Markets Economist at Capital Economics, said Najib Abar helped rebuild the credibility of Turkey’s Central Bank during his short tenure. Investors have long called on Turkey to tighten monetary policy to curb rising inflation and curb capital outflow from foreign investors. Therefore, the monetary policy implemented by Najib Abar has been praised by investors.
Therefore, investors are more concerned about the “collapse” of the market reputation for Turkey. As with a certain curse, the post of Governor of the Central Bank of Turkey is being replaced more and more frequently. You know, Erdogan changed the central bank governor twice in July and November 2020, all due to economic problems like interest rates, exchange rates, and inflation. Some market participants believe that Turkey’s central bank, which frequently changes governor, is already “too unreliable.”
Homelessness in emerging markets
How to do? The market can only “respect the first drop”.
The Turkish lira against the US dollar exchange rate plummeted at the open on the 22nd, falling more than 15% at one point, falling to 8,485 lira per US dollar, close to the lowest level in history. Turkey’s Istanbul 100 Index fell 7% at the same time, which again tripped a circuit breaker. The Istanbul Stock Exchange announced that trading on the stock market, equity and stock index contracts on the derivatives market and the debt securities equity buyback market have been suspended. In addition, ICE data showed that Turkey’s five-year credit default swaps (CDS) rose 53%, the highest level since at least 2009. The price of Turkish government bonds has also fallen sharply and yields have fallen. have fired. The yield on Turkish 10-year government bonds once rose more than 300 basis points.
After the withdrawal of the central bank governor caused market turmoil, Turkey’s Finance and Finance Minister Lutfi Elvan issued an emergency declaration stating that Turkey will continue to maintain a free market and foreign exchange system. Free foreign exchange, the government will continue to put price stability in the first place. place, and fiscal policy will be for the central bank Support efforts to curb inflation. Goldman Sachs noted that after the Turkish central bank appoints a new governor, the Turkish lira may be under pressure, and the Turkish central bank is expected to have a “more advanced rate cut cycle.”
On the one hand, there is the question of the “credibility” of the Turkish central bank, and on the other, it also reflects the impotence of some emerging market central banks. In addition to rising inflation risks in the country, Turkey’s central bank is also facing external pressure, especially developed countries such as the United States continue to “release water”, and long-term government bond yields in the main European and American countries. markets have accelerated to the upside.
Market indicators also show that after Brazil and Russia announced interest rate hikes last week, expectations for tighter policies in India, South Korea, Malaysia and Thailand are also rising. Some analysts said that in the context of developed economies generally adopting ultra-flexible monetary policies, investors’ inflation expectations have risen and they have abandoned bonds such as long-term US Treasuries, which in turn caused a higher volatility in the global financial market. . If developed economies like the United States start to tighten up, emerging market countries will come under greater liquidity pressure, so raising interest rates first is a last resort.
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