Investors Pile Into Lira as Erdogan Backs New Economy Team

Investors began diving back into long-shunned Turkish assets on Wednesday after President Recep Tayyip Erdogan threw his support behind the new central bank governor and economy czar, indicating a possible green light for the large interest-rate increases markets have been looking for.

Erdogan’s comments are critical for the new governor, Naci Agbal, who will face a credibility test when he helms his first Monetary Policy Committee meeting on Nov. 19. With Erdogan saying he won’t interfere, optimism has grown that Turkey will allow interest rates to rise after former Finance Minister Berat Albayrak’s two-year-long battle against markets damaged confidence.

Erdogan appointed Lutfi Elvan this week to replace Albayrak, who was also Erdogan’s son-in-law and abruptly resigned on Sunday. Elvan and the new governor will pursue “transparent and predictable” policies to curb inflation, Erdogan told ruling party lawmakers in parliament on Wednesday. “I will stand by them in every step they take.”

The Turkish leader’s comments offer some evidence that the lira’s recent weakness and the low level of foreign exchange reserves have forced a change of heart among policy makers. Erdogan pledged a policy mix more attentive to expectations of foreign investors and urged confidence in the local currency.

Step Back

Equally important, Erdogan also signaled that he would take a step back from his central role in monetary policy matters.

“Like everywhere else around the world, in our country it is the central bank’s job to determine and implement policies needed to rein in inflation,” he said.

The lira rose as much as 3.5% against the dollar to trade below 8 for the first time since Oct. 26. The benchmark Borsa Istanbul 100 Index rose 1.9%, hitting a new all-time high, led by a surge in banking shares.

While pledging his support for the new management, Erdogan did leave some reason for caution, however. The president has long been an advocate of a theory that contradicts mainstream economics, arguing that lowering interest rates will also lead to lower inflation. He repeated that widely discredited view on Wednesday.

“I’m saying it again and let’s never forget that interest is the cause and inflation is the result,” Erdogan said. “God willing, we’ll get over this hurdle and pull inflation down.”

Below are other highlights of Erdogan’s speech:

  • Turkey is determined to bring down country risk and increase returns for investors
  • “We will not hesitate to apply the right prescriptions even if it is painful”
  • “We will see gains made by domestic and foreign investors who trust in Turkey’s economy and lira as our own gains”
  • Policy makers will be in close contact with investors; Turkey will organize meetings with international investors
  • “The way to strengthen our reserves is to increase confidence in the lira”
  • “Of course, we have difficulties and troubles in the economy, but the picture in front of us also points to serious successes that buoy our hopes”

©2020 Bloomberg L.P.

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