ISTANBUL (Reuters) – Turkey’s new central bank governor told bankers on a 90-minute call on Sunday he planned no immediate policy change, seeking to reassure those predicting quick interest-rate cuts and a sharp lira selloff when markets open, a source told Reuters.
Sahap Kavcioglu, a former banker and outspoken critic of tight monetary policy, was appointed on Saturday in a shock leadership overhaul, the third time since mid-2019 that President Tayyip Erdogan has fired a central bank chief.
Goldman Sachs and others predicted the currency and Turkish assets would plunge when Asian markets opened given Kavcioglu’s dovish views and the latest damage to the bank’s credibility.
On the call with Turkish bank chief executives, Kavcioglu said any policy adjustment would depend on lowering inflation, which he called the primary goal, according to the source who was familiar with the call.
Kavcioglu said the current policy approach would continue, the source added. The central bank did not immediately comment on the call.
In a statement earlier on Sunday, Kavcioglu said policy would focus on permanently lowering inflation, which has been stuck in double digits for most of the last four years.
Erdogan’s staunch opposition to high rates and interference in policy has dogged the major emerging market economy for years. The latest overhaul risked nudging Turkey away from orthodox policy and toward a balance of payments crisis, analysts said.
Erdogan fired the former bank chief, Naci Agbal, two days after a sharp rate hike meant to head off near 16% inflation and a dipping lira. In his less than five months on the job, Agbal’s orthodox approach had begun to restore policy credibility, analysts said.
“It is going to be a dark and long day on Monday,” said one local fund manager.
Cristian Maggio, a strategist at TD Securities, said the lira was likely to shed up to 5% initially, and possibly 10-15% in coming days.
The overhaul “demonstrates the erratic nature of policy decisions in Turkey, especially with regard to monetary matters,” he said. Kavcioglu represents a risk of “looser, unorthodox, and eventually mostly pro-growth policies from now on”.
Kavcioglu’s call with bankers was meant to address the current market and policy situation, two sources told Reuters.
A former lawmaker in the ruling AK Party (AKP), Kavcioglu has espoused the unorthodox policy views shared by Erdogan. He wrote high rates “indirectly cause inflation to rise,” in a newspaper column last month.
WEEKEND OF QUESTIONS
Agbal had hiked the key rate to 19% from 10.25% since November, including the 200 basis-point rise on Thursday which sparked a more than 3% lira rally.
His hawkish stance lifted the lira from record lows beyond 8.5 per dollar in November, dramatically cut Turkey’s CDS risk measures and started to reverse a years-long trend of funds abandoning local assets.
But after Erdogan ousted Agbal, investors told Reuters they had worked through the weekend to predict how quickly and sharply Kavcioglu might slash rates – and how much the currency would retreat from its Friday close of 7.2185 versus the dollar.
The heads of some local treasury desks estimated that offers could range from 7.75 to nearly 8.00 on Monday. At Istanbul’s Grand Bazaar on Saturday, one trader said a dollar bought 7.80-7.90 of the local currency.
Wall Street bank Goldman told clients it was reviewing investment recommendations and predicted a “discontinuous” drop in the lira, and a “front-loaded” rate-cutting cycle.
The overhaul meant capital outflows appeared likely and a rapid adjustment in the current account may be necessary since markets would shy away from funding Turkey’s chronic deficits, it said.
Concerns over central bank independence have exacerbated Turkey’s boom-and-bust economy and record dollarization, and prompted last year’s unorthodox and costly policy of FX interventions, economists say.
The lira has lost half its value since a 2018 currency crisis.
Kavcioglu said in the statement that policy meetings will remain on a monthly schedule, suggesting any rate cuts may wait until the next planned meeting on April 15.
By Ebru Tuncay, Jonathan Spicer
Additional reporting by Nevzat Devranoglu in Ankara and Can Sezer in Istanbul; Writing by Jonathan Spicer; Editing by Catherine Evans and David Evans
