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A gold dealer counts Turkish lira banknotes at his shop at the Grand Bazaar in Istanbul on Aug. 6, 2020.Murad Sezer/Reuters

Turkey’s lira staged its biggest rally in more than two years on Monday, soaring nearly 6 per cent after the surprise departure over the weekend of both the finance minister and the central bank governor, whose replacement said he would zero in on inflation.

Newly-installed governor Naci Agbal said the central bank would “decisively” use all policy tools to achieve its main goal of price stability. Turkish inflation has held near 12 per cent all year, well above a target of around 5 per cent.

The currency’s gains in volatile trade reversed a slide last week to record lows, as analysts raised expectations for an interest rate hike that could ease pressure on the exchange rate and, in turn, on inflation and the external trade deficit.

The rally followed Finance Minister Berat Albayrak’s surprise statement on Sunday that he was resigning for health reasons. A day earlier, President Tayyip Erdogan fired Murat Uysal as central bank governor, replacing him with Agbal, a former finance minister.

While the abrupt leadership upheaval raised political questions, investors cheered Agbal’s first public comments.

The central bank “will decisively use all policy tools in pursuit of its price stability objective,” he said in a statement that promised better communication and a more transparent and predictable approach.

RATE HIKE?

Agbal, a close Erdogan ally, said developments would be monitored until a policy meeting set for Nov. 19 when “necessary policy decisions will be made”.

The lira strengthened as far as 8.08 against the dollar from a close of 8.5445 on Friday. It stood at 8.1250 at 1022 GMT. It was the biggest one-day rally since the currency rebounded from a record low in August 2018, a month after Albayrak became finance minister.

Sekerbank chief economist Gulay Elif Yildirim said Agbal’s statement removed uncertainty about the possibility of an emergency policy meeting before Nov. 19. “Markets took this as a message that a rate hike step will be taken,” she said.

Erdogan has long called publicly for lower rates and last month warned about the “devil’s triangle” of interest rates, foreign exchange and inflation - raising further concerns about the central bank’s policy independence.

The central bank raised rates in September but last month it bucked broad expectations for another policy tightening and held its key rate steady at 10.25 per cent, setting off a renewed lira selloff.

Agbal briefed Erdogan and held talks with bank executives, regulators and economists on Sunday, sources told Reuters.

The lira also rebounded 5 per cent to 9.6 against the euro, having peaked near 10.2 last week.

The reversal follows a 30 per cent slide this year to record lows amid the COVID-19 pandemic, as investors worried about falling forex reserves and the central bank’s ability to tackle double-digit inflation.

In a measure of fading risk, Turkish 5-year credit default swaps dropped below 500 basis points to July levels, while Istanbul’s main stock index rallied 3 per cent.

Some analysts said the twin departures could set the stage for broader moves to halt the lira slide.

Others wanted more proof.

“Until Turkey adopts a much more restrictive monetary policy, downside risks to the currency remain,” said James McCormick, global head of desk strategy at Natwest, who called the removal of Uysal “not especially encouraging” given concerns over monetary independence.

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