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Turkey’s Central Bank Chief May Have Little Time to Repair Trust

(Bloomberg) — If the experience of Sahap Kavcioglu’s most recent predecessors is any indication, Turkey’s new central-bank chief has little time left to win back the trust of foreign-exchange traders — or he may lose it forever.In the past three instances when President Recep Tayyip Erdogan replaced the governor, the reaction of the currency markets in the first week of the new incumbent’s tenure set the tone for his entire term. Which is why the lira’s plunge this week — notwithstanding Kavcioglu’s pledge to maintain policy continuity — is so telling.When Murat Cetinkaya was appointed in 2016, he struggled to reverse an erosion of central-bank credibility that led to an early slide in the lira he was never able to reverse. Murat Uysal suffered a similar experience when he took over in 2019. But when Naci Agbal was appointed last November, he managed to reassure markets almost immediately that he was ready to enact the rate increases needed to tackle inflation. The lira rallied more than any other currency that week, and went on to post the world’s best performance during his term.If that pattern is any indication, traders may have already returned their verdict on Kavcioglu, seeing him as an Erdogan loyalist who will quickly ease policy in line with the president’s view that higher borrowing costs stoke inflation rather than control it. The lira has tumbled about 9% since he took over late last week, signaling concern that Turkey has lapsed back into the vagaries of the past five years, a period marked by currency meltdowns, rising inflation and negative real yields.TURKEY REACT: Cut You Lose Lira, Hike You Lose Central Bank JobKavcioglu sought to reassure markets on Sunday, pledging to use monetary-policy tools effectively to deliver permanent price stability and to stick to the central bank’s scheduled rate-setting meetings. On Tuesday though, Yigit Bulut, a senior adviser to Erdogan, appeared to dial that back, reiterating the president’s desire for lower interest rates.Still, the new governor promised to stick to the single interest-rate framework adopted by his predecessor, state news agency Anadolu reported, citing a meeting between the monetary authority and commercial lenders on Wednesday.When trading began on Monday, the lira lost as much as 15% and ended the day about 8% weaker. One-week borrowing costs surged to a 100%, options volatility jumped to the highest since September 2018 and short traders raised wagers against Istanbul stocks.Erdogan refrained from comments about overhauling the central bank on Wednesday, bringing signs of relative calm to Turkish markets. The lira was little-changed against the U.S. dollar on Wednesday, and the Borsa Istanbul 100 Index closed 2.6% higher.Turkey Spoils Emerging Bond Auctions, But No 2018 Contagion SeenPressure on central-bank chiefs to keep interest rates at, or close to all-time lows has already made Turkey an investment laggard. As the nation’s real yields flipped between world-beating highs and less than zero, the lira has missed out on a revival of confidence in emerging markets. Flows into the world’s developing economies have increased 29% in the past five years, while Turkey’s have declined 54%, according to data compiled by Bloomberg.To be sure, borrowing costs in Turkey aren’t just a function of the multiple benchmark rates the nation has used from time to time. The weighted average cost of funding to banks has been more influential in allowing the central bank to tighten policy without outright hikes. By that measure, governors have created a more hawkish environment than the official rates suggest.Murat Cetinkaya (April 11, 2016 — July 6, 2019)A member of the rate-setting panel before being elevated to the governorship, Murat Cetinkaya was seen as something of a compromise between the lower-rate school favored by Erdogan and the market-friendly approach advocated by Prime Minister Ahmet Davutoglu. But that brief period of calm evaporated as Erdogan quickly reasserted his influence over policy. A failed coup against the president just three months after Cetinkaya’s appointment didn’t help. The governor did tighten funding conditions in the first two years of his tenure, before the 2018 currency crisis prompted him to enact outright increases.But by then, the market appeared to have judged Cetinkaya a slow mover. His subsequent resolve, in which he oversaw 1,650 basis points of rate hikes, failed to restore his credibility, and when he was eventually removed, the lira had lost almost half 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 stimulus to ride out the country’s first recession in a decade. Still, the specter of a double-dip recession was looming and the government wanted to kick-start growth by lowering interest rates as inflation was cooling. All this limited Uysal’s room for maneuver.Despite a promise to pursue independence from the government, Uysal didn’t enjoy the unqualified confidence of traders as he enacted stealth increases rather than lift the benchmark rate, deployed reserves and used state banks to support the lira. As inflation eased, he delivered a net 1,375 basis points of rate cuts. At the end of his tenure, the lira had lost a third of its value as global market turmoil triggered by the Covid-19 pandemic further pressured the currency.Naci Agbal (November 7, 2020 — March 20, 2021)Naci Agbal’s term was a veritable honeymoon for traders as he simplified interest-rate policy, making it more predictable. A former finance minister and a household name in the country, Agbal had no prior experience of monetary policy. Yet he was seen as a welcome antidote to Uysal’s dovishness. And as Erdogan pledged to embrace more orthodox policies, confidence in the central bank’s ability to keep rates aligned with economic conditions soared.Agbal delivered 875 basis points of rate hikes during his four-month governorship, including a larger-than-expected 200 basis-point increase last Thursday. That day may have marked a high-point in confidence in the period since the 2016 coup attempt. The following day, he was fired.(Adds Kavcigolu’s pledge in sixth paragraph, updates Wednesday’s lira and stock moves in eighth paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.