Turkey’s economy has been thrown into renewed turmoil after the president, Recep Tayyip Erdogan, sacked the head of the country’s central bank days after raising interest rates to tackle soaring inflation.
The Turkish lira plunged by almost 15% on Monday, while the Istanbul stock exchange shed a 10th of its value after the president shocked global investors by replacing Naci Agbal with a party loyalist.
The currency recovered some ground to trade about 8% lower against the US dollar, after the Turkish finance minister, Lütfi Elvan, issued a statement saying the country would continue to prioritise free-market policies – seen by global investors as a sign the country would refrain from using capital controls.
Agbal will be replaced by Sahap Kavcioglu, a former member of parliament for Erdogan’s ruling Justice and Development party (AKP).
Agbal had won market praise since his appointment in November for fighting soaring levels of inflation by steadily raising interest rates by a total of 8.75 percentage points to 19%, the highest level among big economies, including a 2-point rise last week.
Turkish inflation is running at more than 15%, three times the central bank’s target rate, fuelled by rising global oil prices as financial investors bet on a faster economic recovery from Covid-19. Despite Monday’s sell-off, the lira remains above the level it was at against the dollar when Agbal first took charge.
Central banks around the world use higher borrowing costs in an attempt to put a brake on inflation. However, Erdogan has previously suggested that high interest rates fuel higher inflation, contrary to the view of mainstream macroeconomists, and has placed an emphasis on keeping the country’s economy growing with help from cheaper borrowing costs.
However, analysts warned multiple leadership changes at the central bank in recent years undermined its authority and raised doubts about its commitment to tackling inflation.
Agbal becomes the third governor to be fired in less than two years, sharing the fate of his predecessor, Murat Uysal, who was blamed for a sell-off in the lira after he resisted raising interest rates, and Murat Çetinkaya, who was sacked in July 2019 for keeping interest rates too high.
Maya Senussi, a senior economist at the consultancy Oxford Economics, said the sell-off in the Turkish currency, stock market and other assets linked to the country, including bonds, demonstrated investors’ concern over the ousting of Agbal.
“Not only does it likely herald a premature easing of policy in the short term, the [central bank] leadership has now been removed once too often, leaving the bank with no credibility,” she said.