The beleaguered Turkish lira hit its strongest rise in more than two years on Monday after the sudden departure of the country’s finance and central bank chiefs.
The Turkish lira hit its biggest rise in more than two years on Monday, rising nearly 6 percent after the sudden departure of the finance minister and central bank governor over the weekend, whose replacement said he would not focus on inflation.
The new governor, Naji Aghbal, said the central bank would “decisively” use all policy tools to achieve its main objective of price stability. Turkish inflation has held steady near 12% throughout the year, well above the target of around 5%.
The currency’s gains in choppy trade reversed last week’s decline to record lows, as analysts raised their expectations of interest rate hikes that could ease pressure on the exchange rate, and thus on inflation and the external trade deficit.
The demonstration came on the heels of the surprise statement of Finance Minister Berat Albayrak, on Sunday, that he had resigned for health reasons. The day before, President Recep Tayyip Erdogan dismissed Murat Uysal as governor of the central bank, to be replaced by former finance minister Aghbal.
While the sudden leadership turmoil raised political questions, investors welcomed Iqbal’s first public comments.
In a statement, he said the central bank would “decisively use all policy tools in pursuit of the price stability goal,” and promised better communication and a more transparent and predictable approach.
Rate increase?
Abal, a close ally of Erdogan, said the developments would be monitored until the policy meeting scheduled for November 19 when “the necessary political decisions are taken.”
Since Friday’s close at 8.5445 on Friday, the lira has stabilized at 8.1250 at 10:22 GMT on Monday.
It was the largest single-day rise since the currency recovered from a record low in August 2018, a month after Albayrak took over as finance minister.
Sekerbank chief economist Gulay Elif Yildirim said Aghbal’s statement demystified the possibility of holding an emergency policy meeting before November 19. “The markets took this as a message that a step would be taken to raise the interest rate,” she said.
Erdogan has always publicly called for lower rates and last month warned of a “devil’s triangle” to interest rates, foreign exchange and inflation – sparking further concerns about the central bank’s policy independence.
The central bank raised interest rates in September but last month bucked public expectations to tighten policy again and kept its key rate unchanged at 10.25 percent, prompting a renewed pound selling.
Sources told the Reuters news agency that Aghbal briefed Erdogan and held talks with bank directors, regulators and economists on Sunday.
The lira also rebounded 5% to 9.6% against the euro, after peaking near 10.2 last week.
The reversal comes on the heels of a 30 percent slide this year to its lowest level amid the Covid-19 pandemic, as investors are concerned about the decline in foreign exchange reserves and the central bank’s ability to tackle double-digit inflation.
In a measure of vanishing risk, Turkey’s five-year credit default swaps fell below 500 basis points to July levels, while Istanbul’s main stock market index rose 3 percent.
Some analysts said the departure of the twins could pave the way for broader moves to stop the lira’s slide.
Others wanted more evidence.
“Until Turkey adopts a much more restrictive monetary policy, downside risks to the currency remain,” said James McCormick, global head of office strategy at Natwest, who described Uysal’s removal as “not particularly encouraging” given concerns about monetary independence.
