Turkish lira plummets after Erdoğan fires hawkish central bank chief

Turkey’s lira dived towards a record low against the dollar after President Recep Tayyip Erdoğan sacked and replaced the governor of the central bank.

The lira fell by 16 percent to 8.39 per dollar in early morning trade in Asia, just short of the all-time low of 8.58 per dollar reached in early November.

Erdoğan fired central bank chief Naci Ağbal, who he had appointed on Nov. 7, late on Friday, the day after he raised the interest rates for a third time in five months to rein in double-digit inflation. Erdoğan replaced him with Sahap Kavcıoğlu, a former deputy for the governing party who has advocated lower interest rates.

Erdoğan’s decision to appoint a new central bank chief, the fourth in less than two years, threatens renewed turmoil in Turkey’s financial markets, which were wracked by a currency crisis in 2018. The central bank’s decision to keep interest rates at below inflation for much of last year under then-governor Murat Uysal had caused the lira to slump to fresh record lows as Turks bought dollars in their droves.

“Erdoğan’s abrupt sacking of Ağbal marks a return to unorthodox policies that will fuel uncertainties, destroy investor confidence and ultimately trigger capital controls,” financial consultancy and research firm Eurasia Group said in a report to clients.

Ağbal hiked interest rates to 19 percent from 17 percent on Thursday, citing the threat of accelerating inflation, which stood at 15.6 percent in February. A former finance minister, Ağbal had quickly won the trust of foreign investors, leading to a return of billions of dollars of capital to the bond and stock markets.

Erdoğan is an advocate of lower interest rates, claiming high borrowing costs are inflationary, a view that jars with conventional economic theory.

Kavcıoğlu, who is also employed as a columnist for the Islamist Yeni Şafak newspaper, supported interest rate cuts in February, saying in an article that it was “saddening” to see bankers and business organisations promoting high borrowing costs when other countries had negative interest rates.

The central bank spent tens of billions of dollars of its foreign currency reserves last year in defence of the lira. As the reserves began to run low, the government instructed state-run banks to intervene.

“We expect Turkey to launch an ad-hoc lira defence from Monday, trying to manage in chaotic fashion the fallout from Ağbal’s ouster although with a low chance of success,” Eurasia Group said.

Turks stockpiled dollars, euros and gold over the past year to protect their savings against lira volatility and surging inflation. Foreign currency deposits now total more than half of overall deposits in the banking system.

In a statement on Sunday, Kavcıoğlu sought to reassure investors, saying the central bank was committed to slowing inflation and helping the economy to grow sustainably.

Opinion polls in recent months have reflected low confidence among the public in Erdoğan’s economic policies.

Kavcıoğlu, a lecturer in banking at Istanbul’s Marmara University, is a former student of Erisah Arıcan, a senior adviser to Erdoğan who helped the latter’s son-in-law and former treasury and finance minister Berat Albayrak complete his thesis at Marmara.

Albayrak resigned from his ministerial post in November after encouraging the central bank to spend its foreign currency reserves, leaving them severely depleted, and using state-run banks to engineer a borrowing boom. Kavcıoğlu’s arrival may intensify speculation that Albayrak will continue to weigh in on economic and monetary policy.

Kavcıoğlu is also a former director of the state-run Halkbank, which faces trial in the United States charged with helping Iran evade U.S. sanctions for its nuclear programme. He was deputy CEO of Halkbank between 2005 and 2015, which includes the period in which the company is accused of committing the crime.

He served as a parliamentarian for Erdoğan’s AKP between 2015 and 2018.