(July 8): The lira slumped more than 3% after President Recep Tayyip Erdogan’s shock decision to replace the country’s central bank governor fuelled concern the regulator will lower borrowing costs by more than expected.
The currency was quoted at 5.81 per US dollar as of 3.06am in Hong Kong, paring its world-beating advance over the past two months. It closed Friday in New York at 5.628 per US dollar.
Erdogan used his executive powers to dismiss Murat Cetinkaya over the weekend, potentially undermining the regulator’s independence just weeks before it’s scheduled to decide on policy. Deputy Governor Murat Uysal was named as a replacement.
During a closed meeting after the decree came out, Erdogan told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher interest rates cause inflation, according to an official who was present. He also threatened consequences for anyone who defies the government’s economic policies, the official said.
The decision also gives bears the justification they needed for keeping bets against the currency at the highest in the world, in spite of the lira’s rally since early May, according to risk reversals.
“It’s undoubtedly bad news for Turkish assets,” Nigel Rendell, a London-based senior analyst at Medley, said on Saturday. “Once again Erdogan is interfering in the operation of the central bank because he thinks he knows best, which he doesn’t.”
