The lira traded around 8.4 against the US dollar at the start of Asia-Pacific trading on Monday, marking a sharp depreciation from Friday’s closing level of 7.22 TL. Volumes are generally thin in the lira-dollar pair at this time of day; however, a source at a bank said activity was above usual levels. The currency subsequently reduced losses to decline about 12% to 8.1 against the dollar.
The removal of Naci Agbal, announced in the early hours of Saturday, shocked many local and foreign investors who had applauded official decisions to move Turkey towards a more orthodox monetary policy.
“Relaxing what was briefly appropriate macroeconomic policy is going to be painful,” said Edward Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle, adding that it would hurt the attractiveness of Turkish assets.
Agbal’s appointment in November as part of a broader economic leadership reshuffle helped spark a strong rally in the lira, which was at one point the top performing emerging market currency of 2021 after falling to a historic low. The lira had recovered to nearly a fifth of its low of around 8.58 for the US dollar on November 6 before Agbal’s pullout.
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 he had overseen Last year.
Investors have long been calling for a tighter monetary policy in Turkey to tame inflation, which is hovering over 15 percent and suppress strong outflows by foreign investors.
Ehsan Khoman, head of emerging markets research at MUFG Bank in Dubai, said Agbal’s leadership and the central bank’s cautious actions had played a “central role” in restoring confidence in the lira. and Turkish assets.
Traders and analysts fear that Erdogan’s decision to install Sahap Kavcioglu in the post will quickly erode the gains made during Agbal’s short tenure. Kavcioglu is a little-known banking professor and a former lawmaker for the ruling Justice and Development Party.
The new central bank chief wrote in his column for the Islamist newspaper Yeni Safak last month that “increases in interest rates will indirectly lead to higher inflation” – an opinion that goes against most. modern macroeconomic theories, but which is also supported by Erdogan, a vocal opponent of high rates.
Robin Brooks, chief economist at the Institute of International Finance think tank, said Turkey was at risk of “big” investor outflows, which would put pressure on the lira.
Goldman Sachs on Sunday warned of “significant risks of a weaker short-term discontinuous move in the lira.”
“Big surprises tend to take a toll on the market and I think we can expect some pretty aggressive declines from the read,” said Paul McNamara, chief investment officer at GAM.
Kavcioglu said in a statement on Sunday that the central bank “will continue to use the tools of monetary policy effectively, in accordance with its main objective of achieving a permanent fall in inflation”.
Turkey’s sudden change in the direction of monetary policy came during a difficult time for emerging markets, which came under pressure as borrowing costs in the United States and other developing markets soared. . Last week, Russia and Brazil joined Turkey in raising interest rates as they sought to contain inflation.
Additional reporting by Katie Martin and Hudson Lockett in Hong Kong