Lira slides as traders question credibility of Turkish Central Bank

The Turkish currency dropped 3 per cent in early Asian trade

Foreign currency exchange rates are displayed on a digital board outside a bureau de change in Istanbul, Turkey, on Tuesday, June 25, 2019. Turkey’s lira erased its gains as the prospect of U.S. sanctions over the country’s planned purchase of a Russian missile-defense system took the shine off Sunday’s landslide opposition victory in Istanbul. Photographer: Miguel Angel Sanchez/Bloomberg
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Turkish lira slumped more than 3 per cent 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 2.1 per cent lower at 5.7487 per dollar as of 8.54am in Singapore, paring its world-beating advance over the past two months. It weakened to 5.8247 in early morning Asia trade, according to Bloomberg data.

Mr Erdogan used his executive powers to dismiss Murat Cetinkaya over the weekend, potentially undermining the regulator’s independence just weeks before it is scheduled to decide on policy. Deputy governor Murat Uysal was named as a replacement.

During a closed meeting after the decree came out, Mr Erdogan told policymakers 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 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,” said Nigel Rendell, a senior analyst at Medley in London. “Once again Erdogan is interfering in the operation of the central bank because he thinks he knows best, which he doesn’t.”

Mr Cetinkaya, appointed governor in April 2016, was criticised for acting too slowly to tighten monetary policy during a currency rout in August. He then showed resolve in the face of market turmoil, increasing the benchmark interest rate by 625 basis points in September and holding it ever since.

The “crime” of Mr Cetinkaya was not cutting rates, Win Thin, the global head of currency strategy at Brown Brothers Harriman in New York, wrote in a note. “Deputy governor Murat Uysal was named as the replacement, though we all know who really controls monetary policy now.”