The intervention of Turkish President Recep Erdogan at the central bank has collapsed his lira currency by 17%. Erdogan dismissed the President of the central bank Naci Agbal, after he introduced a sharp rise in interest rates to stop the screaming inflation.
Analysts already foresaw heavy weather for the Turkish currency after the announced dismissal on Saturday. On average, when the currency markets were opened on Sunday on Monday, it counted a depreciation of 10 to 15% against the dollar and euro. Also because of the political intervention of the President at the formally independent institute.
Strategist Tim Ash of Bluebay Asset Management warned about a negative shock similar to Brexit for the Turkish economy. , “This is the worst policy decision I can remember in the history of this country.”
President Agbal had just been in office at the central bank for five months. He was immediately replaced by Sahap Kavcioglu, a recognized opponent of interest rate increases and member of Erdogans AK party. It is expected that the banker Kavcioglu will quickly reverse the interest rate increase, according to Erdogans wishes. At least before the banks new policy meeting in April.
Since Abbals appointment on 7 November, the Turkish lira had risen more than 15% compared to the recent low of 8.50 against the iconic US dollar. The lira had almost halved since 2018.
Inflow of capital
Agbal raised the key policy rate by 200 basis points last Thursday, much more than the market expected. In total, Agbal increased the determining interest rate from 875 basis points to 19%, the highest level of all major economies.
This intervention was praised by analysts in Europe: it would help stabilise the Turkish economy, now that inflation has risen to 16%. Last year, that was 11%. Recently, nearly $20 billion in investments flowed back to the Turkish market, after months of outflow of investor capital last year.
Analysts also believe that Agbal had, through vigorous interventions, restored the credibility of the central bank, in a country that until recently underwent enormous growth. Turkeys GDP is now falling 5.9% compared to last year, with an official unemployment rate of 13.5% of the labour force.
The central bank under Naci Agbal had increased interest rates in order to curb the rise in prices and fall in the lira. These price increases affect the purse of Turkish consumers and businesses.
This is the third time in a row that President Erdogan has intervened. He repeatedly calls on his central bank to keep interest rates low. Summer 2019, he already gave the president of the central bank the door when he came up with an interest rate increase. Erdogan also complains about foreign manipulation of the Turkish lira.
The economist Sahap Kavcioglu, 25 years of banker and previously active in Halkbank and Vakifbank, argues precisely that interest rate increases will lead to long-term inflation and increase prices for Turks. Hell be the fourth central bank president in five years.
Erdogan also withdrew Turkey from the Istanbul Convention on Saturday, which tackles the fight against violence against women and domestic violence. According to Erdogans governing party AK, the content of the treaty is not in line with the traditional family values that Turkish society must pursue.