Turkish lira: Sacking of central bank chief could spark currency crisis

Financial analyst predicts ‘an ugly reaction’ from markets after Naci Agbal’s dismissal

Naci Agbal was dismissed as governor of Turkey's central bank, shortly after he increased interest rates. Reuters

The surprise sacking of Turkey's central bank chief, shortly after he increased interest rates, could result in the lira plunging by 15 per cent when markets reopen on Monday, a financial expert said.

At the end of last week, the lira rallied against the US dollar after Turkey’s central bank abruptly increased rates from 17 per cent to 19 per cent, in order to slow rampant inflation.

But hours after markets closed on Friday, Naci Agbal was dismissed by President Recep Tayyip Erdogan.

Mr Agbal had established his independence from the president and won market praise by raising interest rates by 8.75 percentage points since his appointment, just four months ago.

He sought to stem inflation, running at around 16 per cent.

One financial analyst warned that Mr Erdogan's decision could be "as bad as Brexit" – a reference to the UK leaving the EU – after Mr Agbal was replaced by one of the president's party loyalists.

The new governor, career banker Sahap Kavcioglu, from the ruling AK party and little known to foreign investors, is expected to reverse the rate rises.

This could potentially spark a run on the lira, a currency that has lost half its value since 2018.

The sacking of Mr Agbal came as Turkey experienced a dramatic 45 per cent surge in the number of Covid-19 infections in recent days – recording an average of 18,000 new cases a day.

Turkey will almost certainly pass three million infections and 30,000 deaths, when figures emerge on Sunday.

The coronavirus resurgence will be another blow to the country's tourist industry, which usually accounts for up to 11 per cent of Turkey's gross domestic product. In 2018, 45 million international tourists visited the country.

Asked about the sacking, Tim Ash, a senior strategist at BlueBay Asset Management said the decision was "almost as bad as Brexit – in terms of being the worst public policy decision I can remember in a country's history.

"Markets will express their opinions on Monday and it is likely to be an ugly reaction.”

Mr Ash said the lira could fall by 15 per cent on Monday.

The two per cent interest rate increase by Mr Agbal on Thursday, which gave Turkey the highest rates of any large economy, was intended to stabilise the enfeebled lira – which rallied briefly after the move.

The central bank's credibility is under question, particularly after the sacking of three governors in two years.
Market analysts have criticised Ankara's erratic policy decisions and warned the government that the country could be heading towards a balance of payments crisis.