Turkish lira stability threatened after Erdoğan sacks central bank chief

(This story was updated with Tweets and reaction after the eighth and fifteenth paragraphs.)

Turkish President Recep Tayyip Erdoğan sacked central bank governor Naci Ağbal overnight on Friday after he raised interest rates for a third time in five months to stabilise the lira and rein in inflation.

Erdoğan replaced Ağbal with Sahap Kavcıoğlu, a former parliamentarian for his Justice and Development Party (AKP) who has advocated lower interest rates.

Erdoğan’s decision, taken by presidential decree, may threaten renewed turmoil in Turkey’s financial markets - the central bank’s decision to keep interest rates at below inflation for much of last year had sent the lira to successive record lows against the dollar.

Ibrahim Turhan, a former deputy chief of the central bank, labeled Erdoğan’s move as “economic suicide”.

Erdoğan brought in former finance minister Naci Ağbal in early November after the lira hit a record low of 8.58 per dollar. Ağbal immediately set about raising borrowing costs for banks from 10.25 percent, winning applause from foreign investors. He last raised interest rates by 200 basis points to 19 percent on Thursday, vowing to slow inflation of 15.6 percent toward a 5 percent target.

Erdoğan is a known proponent of low borrowing costs, claiming high interest rates are inflationary. Kavcıoğlu, who also writes for the Islamist Yeni Şafak newspaper, advocated lower rates in February, saying it was “saddening” to see bankers and business organisations promoting high borrowing costs when other countries had negative interest rates.

Yeni Şafak targeted Ağbal directly on Friday, accusing him of implementing policies to benefit London-based owners of “hot money” at the population’s expense.

The Turkish lira gained for a second day yesterday, closing up 1.4 percent at 7.21 per dollar. It remained to be seen whether Kavcıoğlu would call an emergency meeting of the central bank’s board over the weekend ahead of the re-opening of Turkey’s currency markets on Monday.

Turks have 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.

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

Kavcıoğlu, who teaches banking at Istanbul’s Marmara University, is a former student of Erisah Arıcan, a senior adviser to Erdoğan who also advised his son-in-law and former treasury and finance minister Berat Albayrak on his thesis while at Marmara.

Albayrak resigned from his ministerial post in November after encouraging the central bank to spend tens of billions of dollars of its foreign currency reserves in defence of the lira, leaving them severely depleted, and using state-run banks to engineer a borrowing boom. Kavcıoğlu’s arrival may only intensify speculation that Albayrak continues 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, according to his LinkedIN profile.

Ağbal, responding to his resignation on Saturday, said on Twitter: “I express thanks for my dismissal. May the prophet provide good things for all of us”. 

Timothy Ash, a senior emerging markets strategist at BlueBay Asset Management in London, expressed his dismay at Ağbal's dismissal, which he described as "very, very worrying".

"Markets will give their verdict next week", he said.