March 22, 2021 | AtoZ Markets – Turkey’s lira plunged 15% to near its all-time low after markets opened after President Tayyip Erdogan’s shock weekend decision to sack the central bank governor and install a like-minded critic of high interest rates.
Sahap Kavcioglu Appointed as Turkish Central Bank Governor
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 in Turkish assets and a pivot from rate hikes to cuts in a 90-minute call on Sunday.
He told Turkish bank CEOs he planned no immediate policy change, a source told Reuters.
“The lira is being smashed by investors fearing that the custodian of its value does not share their hopes for a stable currency underpinned by positive real interest rates,” said Westpac senior currency strategist Sean Callow, adding that the lira may not yet have found a bottom.
“The real test will be when the volume comes in in Europe,” he said.
Why Lira May Come Under Increasing Pressure
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 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.
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 explained.
That being said, the Lira may come under increasing pressure in the near term, given that Kavcioglu shares President Erdogan’s views on the relationship between interest rates and inflation.
Kavcioglu has previously stated that “the central bank shouldn’t insist on high interest rates” and that hiking rates would “indirectly open the way to increasing inflation”. Therefore, market participants may begin to price in the possibility of lower interest rates in the coming months, and in turn discount the Lira against its US Dollar counterpart.
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