Turkey heads for its next crisis after the lira plunges by 15%

Turkey sacked its central bank governor after just four months in the job, sending the lira down by 15% against the dollar and stocks down by 9%.  

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. 

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. 

Recommended

Early repayment charges: should you abandon your fixed-rate mortgage for a new deal now?
Mortgages

Early repayment charges: should you abandon your fixed-rate mortgage for a new deal now?

Increasing numbers of homeowners are paying an early repayment charge to leave their fixed-rate mortgage deal early, and lock in a new deal now. Shoul…
30 Sep 2022
Energy meter reading day: why you need submit your gas and electricity readings now
Personal finance

Energy meter reading day: why you need submit your gas and electricity readings now

Energy meter reading day - you need to submit your gas and electricity readings as soon as possible ahead of the October energy price increase
30 Sep 2022
Should you fix your mortgage? Here are the best rates available now
Mortgages

Should you fix your mortgage? Here are the best rates available now

Rising interest rates look set to spring a nasty surprise on millions of homeowners next year. You need to take steps today to protect yourself from a…
30 Sep 2022
Why the Bank of England intervened in the bond market
Government bonds

Why the Bank of England intervened in the bond market

A sudden crisis for pension funds exposed to rapidly rising bond yields meant the Bank of England had to act. Cris Sholto Heaton looks at the lessons …
30 Sep 2022

Most Popular

Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022
Why UK firms should start buying French companies
UK stockmarkets

Why UK firms should start buying French companies

The French are on a buying spree, snapping up British companies. We should turn the tables, says Matthew Lynn, and start buying French companies. Here…
28 Sep 2022