Turkey’s lira may suffer deeper losses, opening the way to a possible currency crisis, after President Recep Tayyip Erdoğan sacked the chief of the central bank at the weekend, French bank Societe Generale said.
Erdoğan’s decision to fire governor Naci Ağbal takes the country “beyond the point of no return”, Societe General strategist Phoenix Kalen said, currency news and analysis website FXStreet reported on Monday.
“Without much remaining reserves to defend the currency, and considering an expected exodus in foreign and local investor capital, it may be difficult for Turkey to avoid another currency crisis in the coming months,” Kalen said.
Erdoğan sacked Ağbal overnight on Friday after he raised interest rates by 200 basis points to 19 percent the previous day to rein in inflation and bolster the lira’s value. The president replaced him with Sahap Kavcıoğlu, a former parliamentarian for his governing Justice and Development Party (AKP) who has advocated lower borrowing costs to help spur economic growth.
The lira slumped to as low as 8.48 against the dollar early on Monday. It was trading down 8.8 percent at 7.85 per dollar as of 10:07 a.m. in Istanbul.
The currency is expected to trade at 9.7 per dollar in the second quarter of the year, 9 in the third quarter and 9.3 per dollar in the final three months of the year, Kalen said.
Kavcıoğlu is Turkey’s fourth central bank governor in less than two years. Erdoğan is a vocal opponent of higher interest rates and claims they are inflationary, a view that runs counter to traditional economic thinking.
The central bank, acting in line with government policy, spent tens of billions of dollars of its foreign exchange reserves last year to defend the lira while keeping interest rates at below inflation. The low borrowing costs helped Erdoğan engineer a borrowing boom to help offset the economic impact of the COVID-19 pandemic.
Erdoğan hired Ağbal in early November after the lira hit a record low of 8.58 per dollar. Ağbal set about raising interest rates from 10.25 percent, winning praise from foreign investors.
Inflation in the country stood at 15.6 percent in February and is expected to accelerate in March and April.