(Bloomberg) -- All of the analysts’ reactions to President Recep Tayyip Erdogan’s surprise decision to replace Central Bank Governor Murat Cetinkaya boil down to one issue: Credibility has taken a beating.
Rabobank, BlueBay Asset Management, Medley Global Advisors and TD Securities say the decision reminds investors who’s in charge of monetary policy in Turkey, reviving concerns about Erdogan’s unorthodox views on economics, including the claim that higher interest rates cause inflation.
The lira will probably fall on Monday, giving bears the justification they needed for keeping bets against the currency at the highest level in the world, according to risk-reversal contracts. They’ve been waiting patiently on the sidelines as the lira rallied about 8% since early May, more than a percentage point above its nearest competitor.
And government bonds, which handed investors unrivaled returns during the same period, are likely to suffer a similar fate.
Here’s what analysts had to say:
Nigel Rendell, a London-based senior analyst at Medley:
- “It’s undoubtedly bad news for Turkish assets. Once again Erdogan is interfering in the operation of the central bank because he thinks he knows best, which he doesn’t!”
- “It further dents CBRT and policy credibility just at the point when inflation was beginning to decline
- “The likelihood of a sell-off in the lira brings any near-term rate cut into question. The markets are likely to mark the lira lower”
Cristian Maggio, the head of emerging-market strategy at TD Securities in London:
- “We will almost definitely see a negative lira reaction on Monday”
- “Clearly this is an attempt to have rates lowered. Otherwise Erdogan would not be replacing Cetinkaya a year ahead of time. Front-end rates may fall to price in more easing than already expected. But longer term rates may move in the opposite direction. It will also be a negative for equities”
- “If the lira sell-off causes panic in the market like August of last year, the answer is yes,” he said in response to a question about whether the fallout of Erdogan’s decision to replace Cetinkaya will impact Turkish -- or other -- banking systems
- “However it should be short term and reversible for most other EM assets. As far as Turkish banks are concerned, any lira sell-off will add pressure on local lenders. Especially the state-owned” banks
- “Domestically we’re looking at a recession this year and potential re-acceleration in CPI. Also the CBRT may be forced to hike at a later stage”
Piotr Matys, a London-based strategist at Rabobank:
- “By abruptly dismissing Cetinkaya, Erdogan reminded everyone who is in charge of monetary policy. The decision is set to undermine credibility of the central bank, which may start unwinding the emergency rate hike announced in September much faster than previously anticipated, starting with a large cut at the upcoming meeting”
- “If there is anything positive about it, it’s that investors will have the entire weekend to calmly assess potential implications and perhaps the sell-off on Monday when the markets reopen will not be as substantial as it would have been if the decision was announced on a week day.”
Timothy Ash, a strategist at BlueBay in London:
- “This was an opportunity to refresh and renew the CBRT with someone from outside with real monetary policy gravitas. And that opportunity has been wasted.”
- “Cetinkaya was fired in the end because he did not cut rates fast enough - ironically recent TRY stability was likely due to Cetinkaya’s mea culpa on rates since September last year. The assumption is the new guy was hired because he will cut rates on demand from the presidential palace”
- Ironically, replacing Cetinkaya with Deputy Governor Murat Uysal “likely makes it more difficult for the CBRT to cut rates as the risk now is that the market reacts badly to this HR change at the central bank.”
Ziad Daoud, Bloomberg’s Dubai-based chief Middle East economist:
- “If Erdogan’s aim was to get lower interest rates, then the decision to replace the governor could backfire. The economic conditions were set for a rate cut later this month: inflation is dropping, growth is weak, the lira is stabilizing, and expected cuts from the Federal Reserve mean the global environment is supportive. Now there’s an additional credibility constraint, with financial markets certain to scrutinize the motivation and magnitude of any easing”
- “Investors will question whether it was really warranted by economic data, or if it was delivered under pressure from the government”
- “The decision adds a new economic unknown to existing geopolitical risks facing Turkey. The delivery of the S-400 Russian missile system, expected soon, has strained the relationship with the U.S. and could lead to sanctions. This may result in a repeat of last summer, when the combination of U.S. sanctions and the lack of credibility from the central bank sent the lira into a free fall.”
To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net;Cagan Koc in Istanbul at ckoc2@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, James Ludden
©2019 Bloomberg L.P.
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