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Turkey’s currency fell as much as 14 percent after President Recep Tayyip Erdogan fired the head of the country’s central bank, who had been seen as a crucial force in lifting the lira from record lows.
The lira was trading around 8.4 against the US dollar in early Asia-Pacific trading on Monday, marking a sharp depreciation from Friday’s closing level of TL7.22. Volumes are typically thin on the lira-dollar pair at that time of day; however, a source at a bank said activity was above normal levels. Subsequently, the currency cut losses by as much as 12 percent to 8.1 against the dollar.
Naci Agbal’s dismissal, announced in the early hours of Saturday, shocked many local and foreign investors who had applauded the official’s decisions to steer Turkey towards a more orthodox monetary policy.
“Unrolling what was briefly appropriate macro policy is going to be painful,” said Edward Al-Hussainy, senior analyst for rates and currencies at Columbia Threadneedle, adding that it would hurt the attractiveness of Turkish assets.
Agbal’s appointment in November as part of a broader restructuring of economic leadership helped trigger a strong rally in the lira, which was at one time the best-performing emerging market currency in 2021 after falling to an all-time low. . The lira had recovered nearly a fifth from its low of around 8.58 to the US dollar on November 6 before Agbal’s removal.
The lira had gained last Thursday after Agbal raised interest rates by 2 percentage points, double what economists expected, in addition to a 6.75 percentage point increase it monitored last year.
Investors had long called for tighter monetary policy in Turkey to control inflation that is at more than 15 percent and stifle strong outflows by foreign investors.
Ehsan Khoman, head of emerging markets research at MUFG Bank in Dubai, said Agbal’s leadership and prudent measures by the central bank had played a “pivotal role” in restoring confidence in the lira and Turkish assets.
Traders and analysts worry that Erdogan’s decision to install Sahap Kavcioglu in office could quickly erode the gains made during Agbal’s short tenure. Kavcioglu is a little-known banking professor and former legislator for the ruling Justice and Development party.
The new head of the central bank wrote in his column in the Islamist newspaper Yeni Safak last month that “interest rate increases will indirectly lead to higher inflation,” a view that contradicts most modern macroeconomic theories. but which is also defended by Erdogan. a vocal opponent of high rates.
Robin Brooks, chief economist with the think tank at the Institute of International Finance, said Turkey was at risk of “big” investor outflows, which would put pressure on the lira.
Goldman Sachs warned Sunday of “significant risks of a weaker short-term discontinuous movement in the lira.”
“Big surprises tend to have consequences on the market and I think we can expect quite aggressive declines in the lira,” said Paul McNamara, chief investment officer at GAM.
Kavcioglu said in a statement Sunday that the central bank “will continue to use monetary policy tools effectively in line with its main objective of achieving a permanent drop in inflation.”
Turkey’s sudden change in monetary policy leadership came during a tense time for emerging markets, which have been under pressure as borrowing costs in the US and other developing markets have risen. Last week, Russia and Brazil joined Turkey in raising interest rates as they sought to control inflation.
Additional information from Katie Martin and Hudson Lockett in Hong Kong
