The current governor of the Turkish central bank, Sahap Kavcioglu, wanted to reassure large foreign investors that concerns about premature rate cuts are unfair.
Turkey’s lira hit its worst level to date, $ 8.7, on Thursday, after strong data on U.S. jobs accelerated a three-month decline in which investors lost confidence in authorities’ ability to curb double-digit inflation.
The lira, by far lagging markets, was at 8.705 GMT at 8.705 this year, a record low closing price. The one percent weakening gained momentum as dollar and U.S. yields jumped to stronger-than-expected U.S. payroll data.
The currency has tumbled 17 percent since mid-March, when Turkish President Recep Tayyip Erdogan, a longtime critic of high interest rates, ousted a hawkish and respected central bank chief.
The bank’s current governor, Sahap Kavcioglu, on Wednesday called for reassuring large foreign investors that concerns about premature rate cuts are unfair.
But a number of those on the call told Reuters they were not convinced, especially after Erdogan, who was seen by many as setting rates, said a day earlier that policy relief in the next two months should start.
The president abruptly fired three bank heads in two years, making the country more vulnerable to financial crisis.
‘I think Kavcioglu is on a tourist visa at the [central bank] what he says or does not say can therefore not matter much, ”said Erik Meyersson, senior economist at Stockholm in Handelsbanken.
“If Erdogan says rates are going down in July or August, that’s probably what will happen.”
Those who listened to Kavcioglu and other bank officials during the call said they still expect it to start in the third quarter with the policy rate cut of 19 percent.
‘Please the president’
Inflation has risen to above 17 percent in recent months, but dropped unexpectedly to 16.6 percent in May, mainly due to a shutdown of the coronavirus, official data showed Thursday.
However, most analysts expect consumer prices to rise for most of the year due to currency weakness and high commodity prices, which increases import costs. The lira hit an intraday record of $ 8.88 on Wednesday.
Tourism revenue, usually an offshoot with chronically high current account deficits, has also been hit hard by the coronavirus pandemic.
‘All these factors make us less constructive in Turkey than other … emerging markets [EMs], ”Says Shamaila Khan, head of EM debt strategies at Alliance Bernstein in New York.
‘It’s really hard to figure out how they get credibility. “It is clear that there are political statements about interest rates that are not useful, when they gain credibility,” she said.
The World Bank and other analysts say a major risk to Turkey is a swift policy tightened by the US Federal Reserve, which will raise the dollar more and pull funds out of vulnerable EMs.
During the call to investors, Kavcioglu said that inflation around September or October would enter a significant downward trend.
Nikolay Markov, senior economist at Pictet Asset Management, said the call convinced him that rates would be reduced by mid-summer and that Kavcioglu understood that he “should please the president”.
“He was willing to do anything necessary to postpone a rate-cutting decision as much as possible, while also being aware at some point of the need for it,” Markov said.