Which building boasts the world’s “fastest revolving doors”? asks The Economist. Turkey’s central bank is surely a contender. Three governors have been fired in less than two years by capricious president Recep Tayyip Erdogan. Naci Agbal, the latest boss, was removed at the weekend after just four months in the job. That sent the Turkish lira plunging by 15% against the dollar. Turkish stocks tumbled by 9%.
Agbal’s sin was to have raised interest rates, a big no-no with Erdogan, who subscribes to the eccentric view that higher interest rates bring higher inflation (all economists and analysts believe the opposite). Turkish inflation hit 15.6% last month, prompting Agbal to raise interest rates two percentage points to 19%.
Turkey is not the only emerging market under pressure. Higher US Treasury bond yields have strengthened the dollar. That has prompted central banks from Brazil to Russia to hike interest rates in order to defend the value of their currencies. New Turkish central bank governor Sahap Kavcioglu, an Erdogan ally, looks poised to reverse Agbal’s interest-rate hikes next month. That reduces the lira’s appeal to investors, prompting them to sell it.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This affair is a reminder of the importance of independent central banks, says John Authers on Bloomberg. There are many leaders with odd economic views, but most leave monetary policy to the experts. Autocractic Erdogan cannot resist the urge to meddle.
A familiar script
The next steps are predictable, says Phoenix Kalen of Societe Generale. Kavcioglu will first try to use the central bank’s dwindling currency reserves to defend the lira, “lose the currency battle with markets, and ultimately have to engage in emergency” interest-rate hikes, precisely what he wanted to avoid in the first place. Capital controls could also be in the pipeline. Expect “a vintage emerging markets crisis”.
Trouble in one emerging market can quickly spread to others, notes Russ Mould of AJ Bell. When Malaysia imposed capital controls in 1998, global investors fled from other emerging markets for fear of similar measures. The turmoil rippled worldwide, sending the FTSE into a bear market.
Other big emerging markets look better insulated this time, says William Jackson of Capital Economics. All appear to have the currency reserves they need to ward off a crisis, leaving Turkey as a struggling outlier. Foreign investors have also learnt their lesson from the 2018 lira crisis: non-resident holdings of Turkish assets have fallen by half in dollar terms since then. That reduces the odds that trouble in Turkey will spread beyond its borders. The latest bout of erratic policymaking is bad news for Turkey. A weaker lira will bring higher inflation; the banking sector looks to be in trouble. But it should have a “limited” impact further afield.
-
Inflation held steady in August – will interest rates fall tomorrow?It is the second month in a row where inflation came in at 2.2%, after creeping up in July. But a rate cut still looks unlikely from the Bank of England tomorrow
-
What has Labour said about stamp duty?Critics say stamp duty is clogging up the property market, but the chancellor is unlikely to address it in her Budget
-
Which British stocks offer the best quality and growth?A professional investor highlights British stocks that hit the sweet spot. This week, Alexandra Jackson, manager of Rathbone UK Opportunities Fund, picks three favourites
-
US stocks plummet – is it time to buy bonds?US stocks have taken a dive – should you keep your focus on US markets or turn your head to bonds?
-
Are shares disconnecting from reality?What effect is passive investing having on shares, and are ETFs going the same way?
-
The peak of the AI frenzy has passedWhen did the AI frenzy peak and what does it mean for tech companies?
-
The battle against heart disease and how to invest in itHeart disease is soaring due to rising obesity and an ageing population. But new drugs, treatments and diagnostic tools are on the way.
-
Woodside Energy: an undervalued energy playWoodside Energy offers a cheap way to invest in the growth of the global LNG market. Should you invest?
-
Small caps: how to ride the recovery wave of UK equitiesProfessional investor Ken Wotton highlights British small caps that hit the sweet spot of the British equity market
-
Investing in defence: the easiest way to buy into the boomThe defence sector has taken off, but the opportunities for stock picking are more limited. We explain what to buy
