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.
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.
-
London claims victory in the Brexit warsOpinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
Rachel Reeves's Autumn Budget: What it means for the UKOpinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
-
London claims victory in the Brexit wars
Opinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
The consequences of the Autumn Budget – and what it means for the UK economy
Opinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
-
Reinventing the high street – how to invest in the retailers driving the changeThe high street brands that can make shopping and leisure an enjoyable experience will thrive, says Maryam Cockar
-
8 of the best houses for sale with electric vehicle chargingThe best houses for sale with electric vehicle charging – from a converted World War II control tower in Scotland, to a Victorian country house in Cumbria
-
Big Short investor Michael Burry closes hedge fund Scion CapitalProfile Michael Burry rightly bet against the US mortgage market before the 2008 crisis. Now he is worried about the AI boom
-
The global defence boom has moved beyond Europe – here’s how to profitOpinion Tom Bailey, head of research for the Future of Defence Indo-Pac ex-China UCITS ETF, picks three defence stocks where he'd put his money
-
Profit from a return to the office with WorkspaceWorkspace is an unloved play on the real estate investment trust sector as demand for flexible office space rises
-
New frontiers: the future of cybersecurity and how to investMatthew Partridge reviews the key trends in the cybersecurity sector and how to profit
