Investors brace for uproar to read it after central bank chief Erdogan sacked

Traders brace for turkish lira volatility jolt after President Recep Tayyip Erdogan sacked the country’s central bank chief, who was seen as a key force in pulling the lira off its all-time lows of the year last.

The deletion of Naci Agbal, announced in the early hours of Saturday, shocked many local and foreign investors who 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 currencies analyst at Columbia Threadneedle, adding that it would affect the attractiveness of Turkish assets.

Agbal’s appointment in November, which was part of a disruption of economic leadership, helped trigger a strong rally in the lira after the currency fell to an all-time low. The lira was at one point the best performing emerging market currency of 2021 and has recovered nearly a fifth of the low of around 8.58 for the US dollar hit on November 6.

The lira had gained last Thursday after Agbal raised interest rates by 2 percentage points, double what economists expected and adding to a 6.75 percentage point increase he oversaw last year.

Investors have long called for a tightening of monetary policy in Turkey to tame the inflation which more than 15 percent and to suppress the strong outflows of foreign investors.

Ehsan Khoman, head of emerging markets research at MUFG Bank in Dubai, said Agbal’s leadership and central bank’s cautious actions played a role “Pivot role” to restore confidence in the Turkish lira and assets.

Traders and analysts now 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.

Line graph of the annual change in the CPI (%) showing that Turkish inflation has cooled but remains high

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 and is also embraced by Erdogan, a vocal opponent of high rates.

Robin Brooks, chief economist at the Institute of International Finance think-tank, said Turkey was now at risk of “big” outflows from investors who pressured the lira.

Goldman Sachs warned on Sunday it saw “significant risks of a weaker short-term discontinuous move in the lira.” The investment bank said local lenders have cited retail clients to buy the lira between TL7.7 and TL7.8 at the dollar level, much lower than Friday’s closing level of around 7.22. TL.

Currency trading begins in Asia around 10 p.m. GMT.

“Big surprises tend to take a toll on the market and I think we can expect some pretty aggressive declines from reading it at the opening and in the next few days,” added 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 comes at a difficult time for emerging markets, which have come under pressure as borrowing costs in the US and other developing markets have risen. Last week, Russia and Brazil both joined with Turkey in raising interest rates as they sought to contain inflation.

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