ISTANBUL: Turkey’s lira weakened on Monday after President Tayyip Erdogan dismissed the central bank governor, reigniting concerns about political interference in monetary policy and expectations of rate cuts to revive the recession-hit economy.
The lira stood at 5.7285 to the US currency at 0933 GMT, 1.6 per cent weaker than Friday’s close but off a low of 5.8245 in early Asian trade as investors fretted about the implications of the move for central bank independence.
“His removal speaks to Erdogan’s insistence on imposing his diktats on monetary policy, and more broadly, it suggests tight presidential control of economic policies,” said Phoenix Kalen, EM strategy director at Societe Generale.
She said the dismissal challenged the thesis that Erdogan would exhibit greater pragmatism after the defeat of his AK Party’s candidate in the re-run of the Istanbul mayoral election and that the economy would be allowed to gradually rebalance.
“Monetary policy-setting might be even more influenced by political pressure, leading to aggressive interest rate cuts that could undermine financial market stability and demand for local assets,” she added in a research note.
The lira is down about 8 per cent this year after having plummeted 30 per cent last year during the currency crisis. The main share index fell 1.14 per cent, with banks down 1.7 per cent. Turkey’s dollar-denominated bonds dropped across the curve.
Governor Murat Cetinkaya, whose four-year term was due to run until 2020, was replaced by his deputy Murat Uysal, a presidential decree published early on Saturday in the official gazette showed.
Uysal, who has served as deputy governor for three years, is known as one of the more dovish of the bank’s rate setters.
No official reason was given for the sacking, but government sources cited Erdogan’s frustration that the bank had kept its benchmark interest rate at 24 per cent since last September to support the lira.
Isik Securities analyst Yusuf Kavak said the bank was now expected to cut rates more sharply when it meets on July 25. “The expectation has taken hold in the market that there may be a stronger interest rate cut,” he said. — Reuters
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