Turkey facing costs of monetary policy upheaval, Fitch says

Turkey faces the prospect of more dovish monetary policy, damaging the credibility of the central bank among investors, after President Recep Tayyip Erdoğan replaced its governor earlier this month, Fitch Ratings said.

Erdoğan’s decision to sack former finance minister Naci Ağbal overnight on March 19 and to hire Şahap Kavcıoğlu, who has opposed high interest rates, as governor came shockingly early into Ağbal’s term, which began in early November, Douglas Winslow, a director in Fitch’s sovereign ratings team, told Reuters.

Turkey faces the risk of “looser and less orthodox monetary policy” in the coming months, Winslow said in comments published on Monday. Fitch’s rating on Turkish sovereign debt stands at ‘BB-‘ with a stable outlook.

“The clearest implication is it reinforces president Erdoğan’s opposition to high interest rates in the context of his unorthodox views on their link with inflation - further damaging monetary policy credibility,” he said.

“We didn’t expect such a move so early in (Ağbal’s) term because of his previous relationship with president Erdoğan, and the fact that since taking office in November there had been a partial lira recovery and stabilisation of FX reserves.”

Turkey’s lira has slid against the dollar since Kavcıoğlu’s arrival, falling from 7.21 per dollar to beyond 8 against the U.S. currency.

On Monday, Kavcıoğlu said investors should not take it for granted that the central bank will cut interest rates at its next meeting on monetary policy on April 15. The central bank is committed to a goal of slowing inflation to 5 percent, he said in answer to questions from Bloomberg.

Annual consumer price inflation stood at 15.6 percent in February, the highest in major emerging markets outside of crisis-hit Argentina.

A surge in interest rates in the offshore swaps market to more than 1,400 percent last week showed the rising costs and uncertainty for investors, Winslow said.

The lira was little changed at 8.13 per dollar on Monday. It sank to a record low of 8.58 per dollar on the day before Ağbal’s appointment.