Turkey’s currency was expected to plunge up to 14 percent after Recep Tayyip Erdogan sacked the country’s central bank chief, who was seen as a key force in pulling the lira of historic lows.
Several banks quoted prices as low as 8.2 to 8.38 lira per US dollar at the beginning of the Asian trading session on Monday, compared to Friday’s closing level of TL7.22, according to data from Bloomberg .
Volumes are usually small in the dollar-lira pair during a period when most trading tables are still closed. However, a source at a currency trading bank said there were already several hundred million dollars in motion, even at that time of morning.
The removal of Naci Agbal, announced early Saturday morning, shocked many local and foreign investors who applauded the official’s decisions to move Turkey to a more orthodox monetary policy.
“Unlinking what was a briefly appropriate macro policy will be painful,” said Edward Al-Hussainy, a senior currency and rate analyst at Columbia Threadneedle, adding that it would affect the appeal of Turkish assets.
The appointment of Agbal in November, which was part of a broader shift in economic leadership, helped trigger a strong recovery in the lira after the currency fell to a historic low. The lira became the best performing emerging market currency in 2021 and recovered almost a fifth from the low of around 8.58 against the US dollar reached on 6 November.
The lira had gained last Thursday after Agbal raised interest rates by 2 percentage points, double what economists had expected and added to a 6.75 percentage point increase that he oversaw last year.
Investors have long called for a stricter monetary policy in Turkey to control inflation, which is over 15%, and contain strong outflows from foreign investors.
Ehsan Khoman, head of emerging markets research at the MUFG Bank in Dubai, said that Agbal’s leadership and the central bank’s prudent measures played a “key role” in restoring confidence in the Turkish lira and assets.
Traders and analysts are now concerned that Erdogan’s decision to install Sahap Kavcioglu in office could quickly erode the gains made during Agbal’s short term. Kavcioglu is a little-known bank professor and former legislator for the government’s Justice and Development party.
The new head of the central bank wrote in his column in the Islamic newspaper Yeni Safak last month that “interest rate hikes will indirectly lead to an increase in inflation” – a view that runs counter to most modern macroeconomic theories and is also defended by Erdogan, a vocal opponent of high rates.
Robin Brooks, chief economist at the international finance institute, said Turkey is now at risk of “big” outflows by investors who would put pressure on the lira.
Goldman Sachs warned on Sunday that it sees “significant risks from a weaker short-term discontinuous movement in the lira”.
“Big surprises tend to have consequences in the market and I think we can expect quite aggressive declines in the lira in the open and in the coming days,” added Paul McNamara, investment director at GAM.
Kavcioglu said in a statement on Sunday that the central bank “will continue to use monetary policy instruments effectively, in line with its main objective of achieving a permanent fall in inflation”.
The sudden shift in Turkey’s monetary policy leadership comes during a difficult time for emerging markets, which are under pressure from rising borrowing costs in the US and other developing markets. Last week, Russia and Brazil joined Turkey in raising interest rates in an attempt to contain inflation.
Additional reporting by Katie Martin.