Lira drops as traders fret over Turkish central bank credibility

Turkey's president dismissed central bank Governor Murat Cetinkaya over the weekend.

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    The Turkish lira slumped after President Recep Tayyip Erdogan dismissed central bank governor Murat Cetinkaya following differences over interest rate policy [Chris Ratcliffe/Bloomberg]
    The Turkish lira slumped after President Recep Tayyip Erdogan dismissed central bank governor Murat Cetinkaya following differences over interest rate policy [Chris Ratcliffe/Bloomberg]

    The lira slumped more than 3% after President Recep Tayyip Erdogan's shock decision to replace the country's central bank governor fueled concern the regulator will lower borrowing costs by more than expected.

    The currency was 2.1% lower at 5.7487 per dollar as of 8:54 a.m. 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 compiled data.

    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."

    Cetinkaya, appointed governor in April 2016, was criticized 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 Cetinkaya was not cutting rates, Win Thin, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note. "Deputy Governor Murat Uysal was named as the replacement, though we all know who really controls monetary policy now."

    SOURCE: Bloomberg