Erdogan’s change of Ministry of Foreign Affairs disbands Central Bank’s efforts to save pound

Any possibility that the Turkish Central Bank (TCMB)’s first intervention in the pound in seven years would strengthen the currency has been dampened by Turkish President Recep Tayyip Erdogan’s decision to replace Finance Minister at midnight.

The currency fell as much as 2.1 percent on Thursday, erasing all gains from the previous day, after Erdogan replaced Finance Minister Lutfi Elvan amid a growing rift over interest rate cuts, according to a Bloomberg chart. TCMB sold dollars on the open market on Wednesday for the first time since 2014, helping to briefly halt the selloff that led the pound to depreciate by almost 45% this year.

“The trajectory is unsustainable,” said Cristian Maggio, chief portfolio strategist at TD Securities in London. “The market can not stop doing its job and other players stop trying to hedge their risks.”

Unperturbed by data showing that inflation is approaching 20%, Erdogan has recently stepped up calls for lower borrowing costs. The central bank, led by Sahab Kavtzioglou, responded by introducing cumulative interest rate cuts of 400 basis points since the end of September, a period in which the pound has depreciated by more than 36%, by far the biggest decline in emerging markets. The currency rallied up 8.5% after the central bank intervened, before continuing to fall on Thursday.

The concern for investors is that the departure of Elvan, who was opposed to interest rate cuts, will further reduce the likelihood of a speedy return to Orthodoxy. His replacement, Noureddine Nebati, 57, has been deputy finance minister since 2018 and is considered is close to the former economy tsar Berat Albayrak, Erdogan’s son-in-law.

The change “further reduces the already low probability that the Erdogan government will make a shift to orthodox policies,” said Piotr Matys, senior currency analyst at InTouch Capital Markets Ltd. in London.

What the central banker said

Kavtzioglou said at a meeting of analysts on Thursday that “excessive” currency instability is undesirable. The impact of the current monetary policy will be seen in the first half of next year, a senior official with direct knowledge of the matter told Bloomberg. Inflation is expected to slow because current price increases are temporary, he said.

Part of the inflationary impact may weaken next year, but the question remains as to what will happen in the second half of 2022, according to Ima Sammani, an exchange analyst at Monex Europe.

“If the recovery Erdogan hopes does not materialize,” there will be constant pressure on the pound and higher inflation, which will eventually force the Turkish central bank to raise interest rates again or use more unconventional ways to tighten policy, “he said.

Petros Kranias

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