Central bank – Turkish lira crashes
For the third time since mid-2019, Turkish President Recep Tayyip Erdogan has replaced his country’s central bank governor. The reason for this was not given, but Erdogan’s anger about the rising interest rates apparently played the main role.
The currency guardian Naci Abgal, a former finance minister respected in the financial world, who was killed after only five months in office, unexpectedly and sharply increased the key interest rate from 17.0 to 19.0 percent on Thursday. Abgal wanted to use it to fight inflation. Higher interest rates would have strengthened the local currency, the lira, which would have made imports cheaper and thus dampened inflation. The rate of price increase in Turkey was recently almost 16 percent.
Erdogan, however, considers high interest rates to be the “father and mother of all evils”, in his view they favor inflation.
Turbulence shakes stock exchange in Istanbul
In Turkey, the financial markets reacted in such shock to the dismissal of the central bank governor on Monday that the lira plummeted 17 percent against the dollar.
The prices on the stock exchange in Istanbul collapsed so strongly that, according to the regulations, with such strong price movements, trading had to be suspended for half an hour. The Istanbul leading index and the banking index each fell by almost ten percent. The sell-off in the bond market drove the yield on ten-year Turkish bonds by almost seven percentage points to a two-year high. This is the biggest increase in its history. The dollar and euro appreciated each more than ten percent to 8.1745 and 9.5407 lira, respectively, as strong as they were last 20 years ago.
The finance minister’s statement that Turkey would abide by the rules of the free market provided some reassurance. Economists, on the other hand, are unlikely to place much trust in the new central bank chief Sahap Kavcioglu. The ex-banker, ex-MP of the ruling AKP party and declared opponent of a tight monetary policy had recently criticized Turkish interest rate policy in a newspaper: “Interest rates around the world are close to zero. Considering an increase in Turkey will become our economic one Not solving problems. “
“This suggests that the government will try to stimulate the economy again with low interest rates,” said Selva Demiralp, economics professor at Koc University in Istanbul. This in turn increases the pressure on the lira and could put even more strain on the economy. Turkey is heavily dependent on imports, which become more expensive due to a drop in the rate of the currency. “The Turkish trade deficit continues to grow,” said political scientist Cengiz Günay recently in an interview with the “Wiener Zeitung”. Production in the country has been falling for years and the service sector is growing. The corona crisis is now exacerbating the problem because the important tourism sector is also currently at a standstill.
Erdogan wishes low inflation and growth
About a week ago, Turkish President Erdogan declared that the fight against inflation was one of his most important projects. The goal is a single-digit inflation rate.
In 2020, the rate of inflation in Turkey was temporarily 15 percent, most recently even above. Erdogan also announced economic reforms. Tax policy is to be simplified, productivity, investments, employment and exports are to increase. “We will increase the growth potential,” he said.
The crash of the Turkish lira caused uncertainty not only in Turkey at the beginning of the week. The tremors were felt right up to the Vienna Stock Exchange. The papers of the catering group Do & Co lost a whopping 8.52 percent. The group, whose shares are also traded on the Istanbul stock exchange, is likely to be exposed to an exchange rate risk.
The stock exchanges in Asia also reacted to the Turkish turbulence over the weekend. On Monday, they continued to grow mixed after the slump in the Turkish lira, as stockbrokers fear losses for Japanese private investors who had attracted high interest rates in Turkey. The courses of banks with involvement in Turkey, such as those of the Spanish BBVA Bank, were also affected. Lenders such as Unicredit, ING, HSBC and BNP also felt the consequences. (mojo)