It has been a week since Recep Erdoğan`s decision to fire Turkey`s central-bank governor, Naci Agbal, for raising interest rates. Both Turkey`s stock market and currency, the Turkish lira (TRY), have shown some signs of stabilization after a dramatic drop last Monday. However, TRY weakened today but the fall is likely attributable to the fears of a margin call contagion despite a Bloomberg report that the new central bank governor’s refused to commit to an interest cut.
Turkish central bank Governor Sahap Kavcioglu said markets shouldn’t take for granted that he’ll cut interest rates as soon as April, when he sets monetary policy for the first time since his surprise appointment.
“I do not approve a prejudiced approach to MPC decisions in April or the following months, that a rate cut will be delivered immediately,” Kavcioglu said in a written response to questions emailed by Bloomberg News, referring to monetary policy committee meeting next month.
“In the new period, we will continue to make our decisions with a corporate monetary policy perspective to ensure a permanent fall in inflation. In this respect, we will also monitor the effects of the policy steps taken so far,” Kavcioglu said.
The bull case
Mr. Erdogan’s macroeconomic muddles and meddling reflect both his own intellectual confusion and the inconsistent demands of his supporters. Turkey’s construction industry, which ensures growth and jobs, thrives on easy credit. That contributes to inflation and a flight from the lira. But Turks, especially merchants and small-business folk, who keep much of their money in dollars or euros, vehemently oppose exchange controls. The result is an unstable currency and unstable prices. Turkey is trying to emulate China’s growth strategy (featuring state-backed credit for property and infrastructure investment) without the benefit of its docile depositors and trapped savings.
[Investors] should heed the country’s cautionary tale: if you rely on foreign capital it is risky to compromise central bank independence, especially when global interest rates are rising. Emerging-market investors will treat Turkey as an unfortunate exception only for as long as emerging-market policymakers learn from its unfortunate example.
Blood in the streets?