Turkish lira plunges after Erdogan sacks hawkish central bank chief

Reuters , Sunday 21 Mar 2021

Concerns over central bank independence have exacerbated Turkey's boom-and-bust economy and record dollarisation

FILE PHOTO: Turkey's Central Bank Governor Naci Agbal poses during an interview with Reuters in his office in Istanbul, Turkey, February 4, 2021. REUTERS

Turkey's lira plunged 16% to near its all-time low as markets opened after President Tayyip Erdogan made the shock weekend decision to oust a hawkish central bank governor and install a like-minded critic of high interest rates.

The appointment of Sahap Kavcioglu, a former banker and ruling party lawmaker, in the early hours on Saturday marked the third time since mid-2019 that Erdogan has abruptly fired a central bank chief.

Kavcioglu had sought to ease concerns over a sharp selloff and a pivot from rate hikes to cuts in a 90-minute call on Sunday, in which he told bank CEOs he planned no immediate policy change, a source told Reuters.

But Goldman Sachs and others predicted the lira and Turkish assets would plunge when financial markets opened for the week given the new governor's dovish and even unorthodox views, and what was seen as the latest damage to the bank's credibility.

The currency was down more than 16% at 8.4 versus the dollar, from 7.2185 on Friday, back to levels touched in early November when it reached an intraday record of 8.58.

Liquidity is often thin in early trade, which exaggerates moves. But analysts had expected a sharp dive given Erdogan's staunch opposition to high rates and interference in policy has dogged the major emerging market economy for years.

The latest overhaul could reverse the hawkish and orthodox steps taken by predecessor Naci Agbal, analysts said, and nudge Turkey toward a balance of payments crisis given its depleted buffer of FX reserves.

Erdogan fired Agbal two days after a sharp rate hike that was meant to head off inflation of nearly 16% and a dipping lira.

In his less than five months on the job, Agbal had raised rates by 875 basis points to 19% and regained some policy credibility as the lira rallied from its nadir. But the currency gave back most of those gains in less than 10 minutes as the week's trade began.

"It is going to be a dark and long day on Monday," said one local fund manager.

Cristian Maggio, a strategist at TD Securities, had predicted a 10%-15% lira depreciation over the coming days.

The overhaul "demonstrates the erratic nature of policy decisions in Turkey, especially with regard to monetary matters (and risks) looser, unorthodox, and eventually mostly pro-growth policies from now on," he said.

On the call with Turkish bankers, Kavcioglu said any policy change would depend on lowering inflation, which he said was the primary goal, the source familiar with the call said.

Kavcioglu said the current policy approach would continue, the source added. The central bank did not immediately comment.

In a statement earlier on Sunday, Kavcioglu said the bank would focus on permanently lowering inflation, which has been stuck in double digits for most of the last four years.

A former member of parliament for the AK Party (AKP), Kavcioglu has espoused the unorthodox views shared by Erdogan. He wrote high rates "indirectly cause inflation to rise," in a newspaper column last month.


Agbal's latest rate hike was 200 basis-points on Thursday which sparked a more than 3% lira rally.

His hawkish stance dramatically cut Turkey's CDS risk measures and started to reverse a years-long trend of funds abandoning local assets.

But after Erdogan ousted Agbal, investors told Reuters they had worked through the weekend to predict how quickly and sharply Kavcioglu might cut rates - and how much the currency would retreat.

The heads of some local treasury desks had estimated offers up to 8.00 on Monday. At Istanbul's Grand Bazaar on Saturday, one trader said a dollar bought 7.80-7.90 of the local currency.

Wall Street bank Goldman told clients it was reviewing investment recommendations and predicted a "discontinuous" drop in the lira, and a "front-loaded" rate-cutting cycle.

The overhaul meant capital outflows appeared likely and a rapid adjustment in the current account may be necessary since markets would shy away from funding Turkey's chronic deficits, it said.

Concerns over central bank independence have exacerbated Turkey's boom-and-bust economy and record dollarisation, and prompted last year's unorthodox and costly policy of FX interventions, economists say.

The lira has lost half its value since a 2018 currency crisis.

Kavcioglu said in the statement that policy meetings will remain on a monthly schedule, suggesting any rate cuts may wait until the next planned meeting on April 15.

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