The last few days have been very busy with regard to the people responsible for the economic conditions in Turkey. First it became known that President Erdogan had dismissed his head of the Central Bank Uysal by decree. On Sunday evening, Finance Minister Albayrak, Erdogan’s son-in-law, also announced his resignation. The background to this change of course was obviously that the president did not like the decline of the lira in recent months, nor the melting of currency reserves.
Naci Agbal will succeed Uysal. According to media reports, the former finance minister is considered an investor-friendly technocrat. However, Agbal is a loyal follower of the president and head of the central bank at the mercy of Erdogan. He too is unlikely to succeed in reconciling the president’s economic ideas, according to which a lower key interest rate results in a lower inflation rate, with reality. If the Turkish central bank wants to stabilize the lira (and waive capital controls), Agbal will probably have no choice but to raise the official interest rate significantly. His main task will therefore be to convince President Erdogan of the necessity of such steps.
Foreign exchange market participants hope for improvement
Agbal is receiving some advance praise from currency market participants. For example, this morning the lira moved away from its historical lows recorded at the end of last week and at times rose by around 4%, although the new man at the top signaled in an initial statement that he sees no acute need for action. According to Agbal, the first thing to do is to examine the current situation and expectations and to observe developments. Necessary monetary policy decisions would be made on the basis of existing data and final assessments, Agbal continued.
The next regular meeting of the central bank is scheduled for November 19. Until then, market participants are likely to be patient and give the new head of the central bank the chance to work out his ideas on the way to a more stable currency. If Agbal’s approaches should be able to manage without significantly higher key interest rates, the currently existing advance praise and the patience of investors should quickly fade away and the lira should quickly come under selling pressure again.