Excessive rate hike and throw away the “black hat”

Raising interest rates too fast, throwing away the black hat, the currency has depreciated more than 50% in 3 years, and it just collapsed again
In response to inflation, the Central Bank of Turkey announced an interest rate hike of 200 basis points to 19% on March 18, far exceeding market expectations. However, the country’s President Erdogan, who advocates keeping interest rates low, immediately announced on the 20th that he would remove Abbar, the governor of the country’s central bank.

Excessive rate hike and throw away the "black hat"

Abar, who has been in office for just over four months, has become the central bank governor with the shortest service life in Turkey’s history. This is also the third time since 2019 that Turkish President Erdogan has replaced the country’s central bank governor. Some analysts predict that this personnel change may cause another blow to the prestige of the Turkish central bank, and the Turkish currency lira may experience a substantial depreciation.

On Monday (March 22) in early Asia-Pacific trading, the Turkish lira plunged by 17% against the US dollar.

Raising interest rates too fast, throwing away the black hat, the currency has depreciated more than 50% in 3 years, and it just collapsed again

The global capital market has recently undergone reversals. The yield on the 10-year US Treasury bond has soared, reaching 1.74%, and inflation expectations have risen sharply. After the US launched a US$1.9 trillion economic stimulus package, the world is facing imported inflationary pressures. In response to the current situation, the central banks of Brazil, Turkey and Russia announced interest rate hikes one after another.

The shortest service life of the central bank governor

On March 20, local time, according to Turkey’s Anadolu News Agency, Turkish President Recep Tayyip Erdogan revoked Naci Agbal’s post as central bank governor and appointed Sahap Kavioglu. As the new governor of the central bank. In less than 2 years, the governor of the Turkish Central Bank was changed several times.

Abar, who was fired this time, has only been in office for 4 months. In November 2020, Abar succeeded Murat Uysal as the governor of the Central Bank of Turkey. Prior to this, Uysar had only been in the seat of the country’s central bank governor for more than a year.

The dismissal of Abar this time is believed to be related to the country’s interest rate hike some time ago. Since Abar became the governor of the Central Bank of Turkey, the Central Bank of Turkey has chosen to raise interest rates to deal with inflation. In November last year, the Turkish Central Bank’s benchmark interest rate was raised from 10.25% to 15%, and a month later, it was raised to 17%. On the 18th of this month, the Central Bank of Turkey announced another interest rate hike of 200bp to 19%, far exceeding market expectations.

It is worth noting that the country’s President Erdogan said in January this year that he opposed raising interest rates, which would not benefit the country’s development, and he advocated keeping interest rates low to stimulate economic growth.

In fact, high inflation has always been a “headache” in Turkey in recent years. The Turkish Statistical Office (TUIK) stated on January 4 that the country’s inflation rate in December last year rose to 14.6% from 14% in the previous month. Turkish President Erdogan also stated on the 12th of this month that Turkey will establish a price stability committee to deal with inflation.

It is worth mentioning that Kafcioglu, who succeeded Abar as the governor of the country’s central bank, was a member of the Justice and Development Party led by Erdogan. As you can see from his published articles, he does not agree. The country’s central bank’s interest rate hikes.

Some market analysts believe that the personnel adjustment may aggravate the tensions of the Turkish economic management and “may cause the lira to plummet when the market opens on Monday.” After the currency crisis in 2018, the Turkish lira was affected by geopolitics and other factors. Significant depreciation. Data show that as of February this year, Turkey’s annualized inflation rate has risen to 15.6%, and the Turkish lira’s exchange rate against the U.S. dollar has depreciated more than 50% compared to the beginning of 2018.

The world’s three major central banks successively announced interest rate hikes

Recently, the global capital market has been volatile. The yield on the 10-year US Treasury bond has soared rapidly, once rising to the level of 1.75%, and inflation expectations have risen sharply.

Under the US$1.9 trillion economic stimulus package launched by the United States, the world is also facing imported inflation. In response to the current situation, three central banks around the world have successively announced interest rate hikes:

On March 17, the Central Bank of Brazil announced that it would raise the Selic target interest rate by 75 basis points to 2.75%. This is the first interest rate hike in Brazil since July 2015.

On March 18, the Central Bank of Turkey announced a 200 basis point increase in the key interest rate to 19%.

On March 19, Russia’s central bank governor Nabi Urina announced that the key interest rate would be raised to 4.5%.

Some market participants pointed out that since last year, the United States has implemented multiple rounds of quantitative easing, accelerated the issuance of treasury bonds, and invested a huge amount of base currency. At present, the impact of global water release has begun to appear. “Due to the flood of liquidity in the US dollar, the US stock market has repeatedly set new highs. At the same time, rising prices have adversely affected the economy. The continuous surge in commodity prices means that the manufacturing costs of various countries are also Improving.”

“If inflation continues to heat up, there will be other central banks to follow up to raise interest rates.” Some analysts said that under the globalization situation, the depreciation of the dollar has far-reaching effects. However, my country has not implemented monetization of the fiscal deficit. “The RMB exchange rate is trending stable, the economy is recovering beyond expectations, and inflationary pressure is not great.”

A few days ago, the Governor of the People’s Bank of China, Yi Gang, stated at the China Development High-level Forum Roundtable that China’s current monetary policy is within a normal range and there is room for providing liquidity and an appropriate level of interest rates. “While the macro leverage ratio remains basically stable and provides positive incentives for economic entities, monetary policy needs to balance between supporting economic growth and preventing risks, and curbing the growth and accumulation of financial risks.” Yi Gang pointed out that my country currently needs We will implement a sound monetary policy, support the stabilization of enterprises and ensure employment, continue to fight the battle against major financial risks, and further deepen financial reform and opening up.

Guotai Junan’s research team also analyzed that the U.S. bond interest rate has exceeded the 1.70% expected point, and emerging markets and developed countries continue to release currency tightening signals. “Following the world may continue to repeat the script after China’s monetary policy returned to neutrality in May last year. There is high certainty that U.S. bonds will continue to rise, and the risk of bubble bursting in U.S. technology stocks represented by Nasdaq is increasing.” The team said that once the gray rhino risk is released, the domestic bond market may usher in a round of interest rate swing trading. opportunity.

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