After winning reelection as Turkey’s President, Recep Tayyip Erdogan replaced his central bank governor and finance minister with highly regarded personnel, aiming at a “reset” of sorts for his economic policy. The market so far has been unconvinced and has continued to punish Turkey’s currency, the lira. Reuters reports:
Turkey’s lira weakened as much as 3.3% to a record low on Friday, extending losses a day after the central bank’s large rate hike failed to assure markets that President Tayyip Erdogan was abandoning his long-held unorthodox policies.
The lira touched a record low of 25.74 against the dollar at 1006 GMT, down some 27.3% this year, and was at 25.6480 at 1039 GMT.
The central bank raised its key rate by a hefty 650 basis points to 15% on Thursday, falling well short of expectations of a larger initial tightening that analysts said would have underlined a longer-term commitment to battle inflation.
“The transition appears to be more gradual than we had thought,” Goldman Sachs said in a note.
The central bank said it would go further “in a timely and gradual manner” after its first meeting under new Governor Hafize Gaye Erkan, whom Erdogan appointed after his election victory last month.
New Finance Minister Mehmet Simsek, who is highly regarded by financial markets reinforced the U-turn message saying, “the path towards price stability is going to be gradual but steadfast.”
The move marked a change in course after years of monetary easing in which the one-week repo rate had been cut to 8.5% from 19% in 2021 despite soaring inflation.
In a Reuters poll, the median estimate was for a hike to 21%. Analysts said the smaller move suggested Erkan might have limited room to aggressively tackle inflation under Erdogan, who has eroded the bank’s independence in recent years.
Reflecting the disappointment in the markets, the lira has declined some 8.5% since Thursday’s hike.
Forward swap markets were pricing it at 33 to the dollar in a year’s time compared to around 30 that was priced in before the rate hike.
Goldman said the monetary tightening suggests the bank plans to stick with macro prudential measures “at least for now”, adding that “it will be difficult to fully float the (lira) without having an interest rate anchor.”
The central bank will likely eventually lift rates to a level “consistent with the pricing in the deposit market,” the Wall Street bank added.
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