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The dismissal of the central bank chief triggers turbulence in Turkey

Turkish currency traders were in poor shape on Monday morning (March 22nd). The country’s lira currency fell to near record lows after the fall of central bank governor Naci Agbal on the shock weekend. He was expelled by President Tayyip Erdogan and replaced by the legislature of the ruling party Sahap Kavcioglu. The new man shares the president’s unorthodox belief that high interest rates can fuel inflation. This, and the apparent political control of monetary policy, are deeply alarming for the markets. Kavcioglu is the third head of the central bank that Erdogan has abruptly appointed since mid-2019. Although he has promised not to take a sharp turn in politics, economists have their doubts. Selva Demiralp is a professor at Turkey’s Koc University: “In the future, this is a significant risk to the credibility, which is why Turkey’s credit risk premium is rising, and although the new governor of the central bank has also signaled that they will emphasize this.” Price stability raises questions because if both emphasize price stability then why was Naci Agbal replaced? “In less than five months of operation, Agbal had hiked interest rates by almost 9 percentage points and regained some credibility for the central bank. Now analysts predict that Kavcioglu will likely reverse these increases, which should support the Turkish capital account and dwindle currency reserves. One of Societe Generale told Reuters that there was “financial turmoil.” Concerns caused European stocks to decline early in trading, with money instead flowing into supposedly safe havens such as German government bonds.

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