ISTANBUL (Reuters) – Turkey’s lira plunged 15% to near its all-time low after markets opened following President Tayyip Erdogan’s shocking decision over the weekend to oust the central bank governor and install a critic of like-minded high interest rates.
The appointment of Sahap Kavcioglu, a former banker and legislator for the ruling party, in the early hours of Saturday marked the third time since mid-2019 that Erdogan abruptly fired a central bank chief.
Kavcioglu had tried to ease concerns about a strong Turkish asset sell-off and a shift from rate hikes to cuts in a 90-minute call on Sunday, in which he told bank CEOs he was not planning any changes. policy immediately, a source told Reuters.
The currency fell to as weak as 8.4850 against the dollar, from 7.2185 on Friday, back to levels touched in early November when it hit an intraday record of 8.58. The last time it changed hands was 8.0749.
“The lira is being shattered by investors who fear that the custodian of its value will not share their hopes for a stable currency backed by positive real interest rates,” said Westpac senior currency strategist Sean Callow, adding that it is possible that the lira has not yet found a coin. background.
“The real test will be when the volume hits Europe,” he said.
Goldman Sachs and others had expected a sharp drop in the lira and Turkish assets given the moderate and even unorthodox views of the new governor, and what was seen as the latest damage to the bank’s credibility amid years of political interference that has affected the main emerging market economy. .
The weekend’s review could soon reverse the aggressive steps taken by his predecessor Naci Agbal, analysts said, and push Turkey into a balance of payments crisis due to its depleted currency reserve buffer.
One possible scenario would see the lira swing by as much as 15% in both directions in Monday’s European session as “TRY embarks on a roller coaster driven by capital flight, central bank interventions and bargain hunters,” SEB wrote. Research on a client. Note.
Erdogan fired Agbal two days after a sharp rate hike that was meant to prevent inflation of nearly 16% and a falling lira.
In less than five months on the job, Agbal had raised rates 875 basis points to 19% and regained some political credibility as the lira recovered from its lowest point. But the coin returned most of those gains in less than 10 minutes when the week’s trade began.
“It’s going to be a long dark day on Monday,” said a Turkish fund manager.
Cristian Maggio, a strategist at TD Securities, predicted a depreciation of the lira from 10% to 15% in the coming days.
The review “demonstrates the erratic nature of political decisions in Turkey, especially regarding more flexible, unorthodox monetary issues (and risks) and eventually pro-growth policies from now on,” he said.
In the call with Turkish bankers, Kavcioglu said that any policy change would depend on reducing inflation, which he said was the main goal, the source familiar with the call said.
Kavcioglu said the current policy focus will continue, the source added. The central bank did not immediately comment.
In a statement Sunday, Kavcioglu said the bank would focus on permanently lowering inflation, which has stalled in double digits for most of the past four years.
Kavcioglu, a former member of parliament for Erdogan’s AK Party (AKP), has embraced the unorthodox views shared by the president. He wrote that high rates “indirectly cause inflation to rise,” in a newspaper column last month.
Agbal’s last rate hike was 200 basis points on Thursday, causing the lira to rally more than 3%.
His hard-line stance drastically lowered Turkey’s CDS risk indicators and began to reverse a longstanding trend of funds ditching local assets.
But after Erdogan toppled Agbal, investors told Reuters they had worked over the weekend to predict how quickly and drastically Kavcioglu could cut rates, and how much the currency would pull back.
The heads of some local treasury offices had estimated the offers until 8:00 a.m. on Monday. In Istanbul’s Grand Bazaar on Saturday, a trader said that a dollar bought between 7.80 and 7.90 of the local currency.
Wall Street bank Goldman told clients it was reviewing investment recommendations and predicted a “discontinuous” drop in the lira and an “anticipated” rate cut cycle.
The reform meant that capital outflows appeared likely and a quick adjustment in the current account might be necessary as markets would avoid financing Turkey’s chronic deficits, he said.
Concerns about central bank independence have exacerbated Turkey’s boom-and-bust economy and record dollarization, and sparked an unorthodox and costly policy of currency intervention in the past year, economists say.
The lira has lost half its value since the currency crisis of 2018.
Kavcioglu said in the statement that the policy meetings will be kept on a monthly schedule, suggesting that any rate cuts can wait until the next planned meeting on April 15.
Additional reporting by Kevin Buckland in Tokyo, Nevzat Devranoglu in Ankara and Can Sezer and Ali Kucukgocmen in Istanbul; Written by Jonathan Spicer; Edited by Catherine Evans, David Evans, Barbara Lewis, and Lincoln Feast.