Goldman sees immediate lira risk after Turkish central bank ouster

ISTANBUL: President Tayyip Erdogan’s ousting of Turkey’s hawkish central bank chief sharply raises prospects of an immediate “discontinuous” drop in the lira and sets the stage for a “front-loaded” rate-cutting cycle, Goldman Sachs said on Sunday.

The Wall Street bank said that under new Governor Sahap Kavcioglu, interest rates could fall well before its previous forecast of the fourth quarter, though cuts would be limited by the currency weakness and risks to the bank’s credibility.

Kavcioglu, like Erdogan, is an outspoken critic of tight monetary policy.

Inflation, now near 16%, would also limit any policy loosening, it said in a client note. Goldman said there are risks inflation could end the year higher than its already elevated forecast of 12.5%.

It added that its investment recommendations were under review after Erdogan sacked Naci Agbal in the early hours on Saturday. There are “significant risks of a near-term discontinuous move weaker in the lira”, Goldman said.

The overhaul was the third time since mid-2019 that Erdogan had ousted the head of the central bank, again threatening credibility that Agbal had begun to restore with a more orthodox approach since he took the reins in early November.

Goldman said other risks loomed: capital outflows appeared likely and a rapid adjustment in Turkey’s current account may be necessary since it was less likely that markets would fund deficits.

As pressure builds on the lira, the bank under Kavcioglu may revert to an unorthodox and costly policy of FX interventions to prop up the currency, as it did in 2019 and 2020, Goldman said.