The sacking of Turkish Central Bank chairman Mr Naci Agbal made it to the headlines in global financial press, and not in a positive light. Turkey could witness a major currency attack on Monday. It is still not clear why Agbal was let go, though experts are talking about wide-spread complaints by the business community. The new governor Prof Sahap Kavcioglu is an avid supporter of President Erdogan’s infamous “higher interest rates lead to higher inflation” theory. It remains to be seen whether he shall retract Agbal’s Thursday rate hike. Whether he does or not, the knives are out for Turkish financial markets.
Here are excerpts from major Agbal headlines
Financial Times: Erdogan ousts Turkey central bank governor
“This is a truly idiotic decision by Erdogan and markets will express their opinions on Monday, and it is likely to be an ugly reaction,” said Timothy Ash, an analyst at BlueBay Asset Management.
The shake-up is likely to erode hopes among investors that the bank would assert its independence from Erdogan. The currency had strengthened by about 18 per cent since Agbal took the helm and pledged to restore the central bank’s credibility.
Jason Tuvey, senior emerging markets economist at Capital Economics, said Agbal’s sacking increased the risk of a new currency crisis in Turkey.
The country’s $730bn economy has been struggling to emerge from the tumult caused by a currency shock in 2018 when Erdogan’s economic and foreign polices frightened away investors.
Bloomberg: Erdogan Ousts Central-Bank Head, Installs Interest-Rate Ally
In a column published by Yeni Safak on Feb. 9, (new governor) Kavcioglu said it was “saddening” to see columnists, bankers and business organizations in Turkey seeking economic stability in high interest rates at a time when other countries had negative rates.
“The central bank shouldn’t insist on high interest rates,” he wrote. “When interest rates in the world are close to zero, raising interest rates here won’t solve our economic problems. To the contrary, it’ll deepen them in the period ahead.”
He also seconded Erdogan’s unorthodox theory on the relationship between interest rates and inflation, saying that raising interest rates would “indirectly open the way to increasing inflation.” Most central bankers and economists around the world believe the opposite to be true, and would argue for raising interest rates to try and control excessive inflation.
“The key question is how quickly Governor Kavcioglu will try to reverse cumulative 875 basis-points hikes his predecessor delivered since November” said Piotr Matys, an emerging-market strategist at Rabobank. “It is reasonable to assume that he may reverse the most recent 200 basis-points hike as soon as the next meeting of the central bank. Such a decision would not be approved by the market due to prevailing inflationary risks.”
Reuters: Erdogan sacks another cenbank chief after sharp Turkey rate hike
A lack of monetary independence has exacerbated Turkey’s boom-bust growth and record dollarization, and helped keep inflation in double digits for most of the last four years, economists say. The lira has lost half its value since 2018.
“This implies the government will once again try to stimulate the economy by low rate policies,” said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum, in Istanbul.
“Such a priority has a high potential to backfire by causing extreme pressures on the lira and contracting the economy even further,” she said.
A trader at one local bank predicted Kavcioglu would deliver a rate cut before the next scheduled policy meeting in April.
“There is now a very real chance that Turkey is heading for a messy balance of payments crisis,” Jason Tuvey, analyst at Capital Economics, wrote in a note.
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