What’s Up With Turkey’s Lira?

Turkey’s currency weakened heavily against the American dollar. So, why did that happen?

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On Monday, the movement in Turkey’s stocks, bonds and currency rattled several major markets. In one of the sharpest sell-offs in years, the Borsa Istanbul Index plunged 9%, sparking circuit breakers that halted trading. The lira weakened more than 9% against the American dollar.

According to Bloomberg, the yield on Turkey’s benchmark 10-year local-currency bond surged 500 basis points to 19.06%. The 10-year benchmark dollar bond yield jumped 153 basis points to 7.41%. Turkey’s five-year credit-default swaps climbed the move on record, increasing to 472 basis points. Three-month options volatility on the lira rose 32%.

Why This Happened?

This move in Turkey’s stocks, bonds and currency comes after the country’s President Recep Tayyip Erdoğan fired Naci Agbal, who is Turkey’s central bank chief. Agbal was appointed in November, and he had served less than five months as the head of Turkey’s central bank. His exit is the third central bank governor exit in under two years.

Agbal’s Golden Period

During his time as the central bank chief, he raised the country’s main interest rate by roughly 450 basis points to 19%. This rate hike move was seen necessary by the vast majority of economists to control Turkey’s high inflation and bring stability to the Lira. The period also saw an improvement in investor confidence and witnessed portfolio inflows of $10 billion. The lira also appreciated 18% during this period.

All this sounds like Agbal was good to Turkey as his actions were helping the economy, but why was he dismissed? Erdoğan has never been on the side of Agbal as he has spent years railing against interest rates and called interest rates “mother and father of all evil”. The president didn’t give any reason for Agbal’s dismissal, but his decision came two days after Agbal hiked rates by 200 basis points.

The Consequences

It is not rocket science to understand how Agbal’s dismissal is what caused the country’s stocks, bonds and currency to weaken. So, this trend is also expected to continue in the upcoming days.

The lira is weakening, and it might add to inflationary pressures building in the economy and erode Turkey’s real rate. If the new governor cuts rates, investors might pull out their funds from the market. This move by the president also shows how he has a strong hand on the country, and it might also scare investors over the central bank’s lack of autonomy on monetary policy.

So, things don’t look that great for Turkey right now. All we can say is that the Turkish authorities have to put in a lot of effort to prevent another financial crisis.

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