The current governor of Turkey’s central bank, Sahap Kavcioglu, has sought to reassure large foreign investors that concerns about premature rate cuts were unwarranted.
The Turkish lira stabilized at its lowest level on Thursday at 8.7 per dollar, after good US jobs data accelerated a three-month decline in which investors lost confidence in the authorities’ ability to control double-digit inflation.
The lira, far behind emerging markets this year, was at 8.705 at 5:19 pm GMT, a record closing price. Its one percent slippage accelerated as the dollar and US yields surged after stronger-than-expected US wage data.
The currency has fallen 17% since mid-March, when Turkish President Recep Tayyip Erdogan, a longtime critic of high interest rates, ousted a hawkish and well-respected central bank chief.
The bank’s current governor, Sahap Kavcioglu, on Wednesday requested an appeal to reassure large foreign investors that concerns about premature rate cuts were unwarranted.
But several of those interviewed told Reuters news agency they were not convinced, especially after Erdogan – seen by many to determine rates – said a day earlier that the policy easing is expected to start within the next two months.
The president brutally fired three bank managers in two years, making the country more vulnerable to the financial crisis, they said.
“I think Kavcioglu has a tourist visa at [central bank] so what he says or doesn’t say doesn’t really matter, ”said Erik Meyersson, Stockholm-based senior economist at Handelsbanken, who was on the call.
“If Erdogan says rates go down in July or August, that is probably what will happen.”
Those who listened to Kavcioglu and other bank officials on the call said they still expected it to start cutting the policy rate by 19% in the third quarter.
“Please the president”
Inflation has topped 17% in recent months, but unexpectedly fell to 16.6% in May mainly due to the fallout from a coronavirus lockdown, official data showed on Thursday.
Still, most analysts expect consumer prices to stagnate for most of the year due to currency weakness and high commodity prices, which increase import costs. The lira hit an intra-day record of 8.88 per dollar on Wednesday.
Tourism revenues, usually offset by chronically high current account deficits, have also been hit hard by the coronavirus pandemic.
“All of these factors make us less constructive in Turkey than in other … emerging markets [EMs]”said Shamaila Khan, head of emerging debt strategies at AllianceBernstein in New York.
“It’s really hard to understand how they gain credibility. Obviously, whenever they gain credibility, there are political statements about interest rates that are not helpful, ”she said.
The World Bank and other analysts say a significant risk for Turkey is a rapid tightening of policy by the US Federal Reserve, which would further raise the dollar and withdraw funds from vulnerable emerging countries.
Kavcioglu told investors on the call that inflation would enter a significant downtrend around September or October.
Nikolay Markov, senior economist at Pictet Asset Management, said the call convinced him rates would be cut by mid-summer and that Kavcioglu understood he had to “please the president”.
“He seemed prepared to do whatever it takes to delay a rate cut decision as long as possible, while also being aware of the need for it at some point,” Markov said.