Turkish lira falls in volatile trading after central bank chief replaced

Turkey’s lira dropped for a second day after President Recep Tayyip Erdoğan’s dismissal of the governor of the central bank at the weekend led to a mass exodus of capital on Monday.

The lira was trading down 0.3 percent at 7.81 per dollar at 10:42 a.m. local time in Istanbul, with its price varying sharply between 7.74 and 7.94 per dollar. It fell as much as 15 percent on Monday, nearing a record low, before closing the day with losses of 8.4 percent.

Erdoğan’s dismissal of central bank governor Naci Ağbal on Friday night, the day after he hiked interest rates by 2 percentage points to 19 percent, has underscored to investors that Turkey’s top financial institution cannot operate free of political interference. Erdoğan brought in Şahap Kavcıoğlu, a former banker, newspaper columnist and parliamentarian for his Justice and Development Party (AKP), who has advocated cuts to interest rates.

State-run banks intervened in the currency markets on Monday to help keep the lira’s losses contained, according to traders cited by news outlets including Bloomberg. It was not immediately clear if they continued to be active in the markets on Tuesday.

Erdoğan, who says high interest rates are inflationary, has sacked three central bank governors in less than two years after giving himself the power to hire and fire senior personnel when gaining vast new presidential powers in 2018.

The central bank’s ability to defend the embattled lira has become severely limited after Ağbal’s predecessor Murat Uysal spent tens of billions of dollars of its foreign exchange reserves last year to contain a sell-off in the currency while keeping interest rates at below inflation on government orders to engineer a borrowing boom. That policy proved unsustainable, pushing the lira to a record low of 8.58 per dollar in early November, when Ağbal was appointed.

Ağbal set about raising interest rates from 10.25 percent and vowed to keep borrowing costs elevated this year to slow inflation, winning praise from foreign investors before his shock dismissal.

Inflation in Turkey accelerated to 15.6 percent in February. It is expected to nudge higher in March and April due to the weak lira and rising food and oil prices.

On Sunday, Kavcıoğlu told bankers that he had no immediate plans to cut interest rates and the central bank’s next Monetary Policy Committee meeting would be held as scheduled on April 15. The bank is committed to tackling inflation, he said.

Erdoğan should issue a decree to appoint himself central bank chief as a permanent solution to the problems caused by constant changes in management of the institution, opposition Democracy and Progress Party (DEVA) leader and former economy minister Ali Babacan said after Ağbal’s dismissal.

The central bank has been turned into a "punching bag" and there can be no economic governance with such an institution, said Babacan, credited by investors with successfully implementing an IMF loan programme a decade and a half ago.