Turkish lira gains most since March 2019 on bets central bank to hike rates

Turkey’s lira surged on Monday after two key departures from the country’s economic management team raised speculation for a hike in interest rates.

Treasury and Finance Minister Berat Albayrak, the son-in-law of President Recep Tayyip Erdoğan, published a resignation letter on Instagram on Sunday. Albayrak resigned after Erdoğan sacked and replaced the governor of the central bank on Saturday.

The departure of Albayrak and Central Bank Governor Murat Uysal is raising speculation among investors that the central bank will increase benchmark interest rates to help reverse a slump in the lira. The currency fell to a record low on Friday. Uysal’s replacement Naci Ağbal is a respected technocrat.

The lira climbed by as much as 6.2 percent against the dollar, the biggest gain since at least March 2019. It was trading up 5.2 percent at 8.0813 per dollar in mid-afternoon trading local time.

“This unusual set of events could mark a shift towards orthodox policies, which would provide the lira with a much-needed respite,” said Piotr Matys, senior emerging markets currency strategist at Rabobank in London, according to Reuters.

“That said, there is a substantial difference between a correction and a sustainable recovery. Much higher interest rates and a strong commitment to structural reforms - ideally overseen by the IMF are required to adopt a long-term bullish view on the lira,” Matys said.

The government is yet to issue an official confirmation that Albayrak had resigned and his resignation had been accepted. It was not immediately clear who might replace him.

In a statement on Monday, Ağbal indicated that the central bank had no immediate plans to increase the benchmark interest rate from 10.25 percent. The rate currently lags annual consumer inflation of 11.9 percent.

Instead, Ağbal said the central bank would decisively use all policy tools to contain inflation, echoing comments made regularly by his predecessor. Erdoğan is a vocal opponent of higher interest rates saying they are inflationary.

Ahead of a monthly meeting of the Monetary Policy Committee on Nov. 19, the central bank will review expectations, monitor developments closely, and take necessary policy decisions using the available data, Ağbal said.

Ağbal was previously head of the presidential strategy and budget committee. He served as finance minister between 2015 and 2018.