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Turkey’s central bank chief may have little time to mend confidence

(Bloomberg) – If the experience of Sahap Kavcioglu’s most recent predecessors is any indication, the new head of Turkey’s central bank has little time to regain the trust of forex traders – or he could lose it forever. In the past In three cases where President Recep Tayyip Erdogan replaced governor, the reaction of the foreign exchange markets in the first week of the new incumbent’s tenure set the tone for his entire term. This is why the lira’s collapse this week, despite Kavcioglu’s promise to maintain policy continuity, is so significant. When Murat Cetinkaya was appointed in 2016, he sought to reverse an erosion in the central bank’s credibility that resulted in an early decline in the central bank’s credibility, the lira he was never able to reverse. Murat Uysal had a similar experience when he took over in 2019. However, when Naci Agbal was appointed last November, he managed to reassure the markets almost immediately that he was ready to implement the rate hikes needed to fight inflation. The lira rebounded more than any other currency this week and was the world’s best performer during its tenure. If this pattern is indicative, traders may have already returned their verdict on Kavcioglu, viewing him as an Erdogan loyalist who will be quick to ease policy, in line with the president’s view that higher borrowing costs are more likely to boost inflation than control it . The lira has fallen 9% since it was acquired late last week, suggesting Turkey has fallen back into the vagaries of the past five years, a period marked by currency meltdowns, rising inflation and negative real returns. TURKEY REACT: Cut You Lira Lose, Hike You Lose Central Bank JobKavcioglu attempted to calm the markets on Sunday, pledging to use monetary policy tools effectively to ensure lasting price stability and meet the central bank’s scheduled interest rate meetings. On Tuesday, Yigit Bulut, a senior adviser to Erdogan, appeared to be calling this back to reiterate the president’s desire for lower interest rates. Even so, the new governor promised to stick to the single rate limit adopted by his predecessor, State News, the Anadolu agency reported, citing a meeting between the monetary authority and commercial lenders on Wednesday. When trading started on Monday, the lira lost up to 15% and ended the day around 8% weaker. Weekly borrowing costs rose to 100%, options volatility rose to its highest level since September 2018, and short sellers increased stakes on Istanbul stocks. Erdogan on Wednesday did not comment on the central bank overhaul, showing signs of relative calm in Turkish markets. The lira barely changed against the US dollar on Wednesday, and the Borsa Istanbul 100 index closed 2.6% higher – time lows have already made Turkey an investment backlog. As the nation’s real returns fluctuated between the world’s best highs and below zero, the lira missed a rebound in confidence in emerging markets. Inflows into the world’s developing countries have increased 29% over the past five years, while Turkey’s inflows have declined 54%, according to Bloomberg data. However, borrowing costs in Turkey are not just a function of the multiple base rates the nation has used from time to time. The weighted average cost of financing for banks has helped the central bank tighten policies without direct hikes. With this move, the governors have created a more hawkish environment than the official interest rates suggest. Murat Cetinkaya (April 11, 2016 – July 6, 2019) Murat Cetinkaya was a member of the body responsible for setting interest rates before being appointed governor as a kind of compromise between the low-price school favored by Erdogan and the market-friendly approach advocated by Prime Minister Ahmet Davutoglu . But that brief period of calm faded when Erdogan quickly re-established his influence in politics. A failed coup against the president just three months after Cetinkaya’s appointment did not help. The governor tightened funding terms in the first two years of his tenure before the 2018 currency crisis prompted him to raise funds directly. By then, however, the market seemed to have judged Cetinkaya as a slow engine. His later determination to monitor 1,650 basis points for rate hikes failed to restore its credibility, and by the time it was eventually removed the lira had lost nearly half of its value. Murat Uysal (July 6, 2019 – November 7, 2020)) Turkey’s central bank had been on hold for months when Murat Uysal took over, and authorities had relied on fiscal stimuli to help the country break through the country’s first recession in a decade . Still, the specter of a recession loomed and the government wanted to stimulate growth by lowering interest rates while inflation cooled. All of this limited Uysal’s room for maneuver. Despite promises to seek independence from the government, Uysal did not enjoy the full trust of traders as he carried out stealth increases instead of raising interest rates, putting in reserves and using state banks to support the lira. As inflation subsided, it delivered 1,375 basis points net for rate cuts. By the end of his tenure, the lira had lost a third of its value as the global market turmoil triggered by the Covid-19 pandemic put the currency under further pressure. Naci Agbal (November 7, 2020 – March 20, 2021) Naci Agbal’s tenure was a true honeymoon for traders as it simplified interest rate policy and made it more predictable. As a former finance minister and a household name in the country, Agbal had no prior knowledge of monetary policy. Still, it was seen as a welcome antidote to Uysal’s reluctance. And when Erdogan promised to pursue more orthodox policies, confidence soared in the central bank’s ability to adjust interest rates to economic conditions. Agbal delivered 875 basis points for rate hikes during his four month tenure, including an above-expected base of 200 points increase last Thursday. That day may have marked a high point of confidence in the period since the 2016 coup attempt. He was released the following day. (Add Kavcigolu’s promise in the sixth paragraph, update the lira on Wednesday, and stock movement in the eighth paragraph.) 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