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Turkey’s lira briefly fell 15% to near its all-time low on Monday after President Tayyip Erdogan abruptly fired the central bank governor at the weekend and installed a critic of tight policy who is expected to reverse recent rate hikes.

Sahap Kavcioglu, a former ruling party lawmaker who shares Erdogan’s unorthodox view that high interest rates cause inflation, is the third central bank chief the president has appointed since mid-2019.

Saturday’s shock dismissal of Naci Agbal, two days after he hiked rates to curb inflation, reinforced an investor view that has dogged the major emerging market economy for years: that politics overshadows the central bank’s independence.

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The volatile selloff, including a spike in government bond yields to near two-year highs, rattled global financial markets and could unsettle Turks already starting to sour on Erdogan over high living costs and poor job prospects.

The move left Turkey “beyond the point of no return,” said Societe Generale analyst Phoenix Kalen, who predicted “financial turmoil”.

Kavcioglu had sought to ease investors’ concerns about a sharp pivot from tight to expansive monetary policy, telling bank CEOs on Sunday that he planned no immediate policy change, a source told Reuters.

Nurettin Canikli, a deputy head of Erdogan’s ruling AK Party (AKP), said the government sacked Agbal because it thought he “did not use monetary policy instruments rationally ... and thus brought a big financial burden to the economy”.

Analysts said Kavcioglu, an ex-banker, was likely to soon reverse the aggressive rate rises Agbal had adopted in the face of near 16% inflation and foreign reserves that had dwindled under his predecessors.

“Erdogan remains a populist authoritarian, whose understanding of macroeconomics is non-existent,” said Jan Dehn, London-based head of research at Ashmore Group.

“The issue is that these dynamics will hit a population that is suffering with inflation.”

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The currency briefly dipped to 8.4850 to the dollar from 7.2185 on Friday, near its record low of 8.58 from last November, before Agbal was appointed.

It recovered about half of its losses after Finance Minister Lutfi Elvan said Turkey would keep to free market rules, and at 1447 GMT stood at 7.92 to the dollar, 9% weaker -- and about half what it was worth before a full-scale crisis in mid-2018.

Istanbul’s main share index was down 10% with banks hardest hit. Longer-dated Turkish dollar bonds logged the biggest daily drop on record.

Five-year credit default swaps, insurance against a Turkish default, surged from Friday’s 305 basis points to 452, their highest since early November.

Turkey “will be left with two choices” said Per Hammarlund, senior EM strategist at SEB Research. “Either it pledges to use interest rates to stabilise markets, or it imposes capital controls.”

Others said “soft” controls such as FX swaps limits and state bank support for the lira were likely. Elvan, the finance minister, said authorities would stick to free-market rules and a free-floating currency regime.

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In only four months in the job, Agbal, also an AKP member, restored some policy credibility by raising the policy rate nearly 9 percentage points to 19%. He had said a long period of tight policy was needed to get inflation down to a 5% target.

Turkish food prices have soared some 20% over the past year, pinching households amid the coronavirus pandemic and adding to a dip in Erdogan’s opinion poll ratings.

“Where do you think Turkey’s economy is going when the central bank governor is replaced in every 15 days or three months?” said Ogun Gun, a gold trader who said he did not open his Istanbul shop on Monday morning because no one would come.


Kavcioglu has directly criticised rate hikes under Agbal and last month wrote in a newspaper column that high rates “indirectly cause inflation to rise”.

But in Sunday’s call with Turkish bankers, Kavcioglu said current policy would continue and any change would depend on lowering inflation, the source familiar with the call said.

The central bank did not comment on the call. In a public statement on Sunday, Kavcioglu said his focus was permanently lowering inflation, which has been stuck in double digits for most of the last four years.

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He said policy meetings will remain on a monthly schedule, suggesting any rate cuts may wait until the next planned meeting on April 15.

After the leadership overhaul was announced in the early hours of Saturday, investors said they had worked through the weekend to predict how quickly rates would be cut and how much the currency would retreat.

Cristian Maggio, a strategist at TD Securities, said Agbal’s removal suggested “looser, unorthodox, and eventually mostly pro-growth policies from now on”.

Wall Street bank Goldman Sachs told clients it was reviewing investment recommendations. It said capital outflows appeared likely and a rapid adjustment in the current account might be necessary since markets would shy away from funding Turkey’s chronic deficits.

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