Turkish officials sought to arrest the third bout of currency turmoil in less than three years on Monday after President Recep Tayyip Erdoğan sacked the governor of the central bank at the weekend.
The lira slid to as low as 8.48 against the dollar early on Monday, nearing a record low of 8.58 per dollar. It was trading down 9.7 percent at 7.91 per dollar as of 11:01 a.m. in Istanbul.
Erdoğan sacked governor Naci 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 brought in Sahap Kavcıoğlu, a former parliamentarian for his governing Justice and Development Party (AKP) who has advocated lower interest rates to help spur economic growth.
Turkey is committed to reducing double-digit inflation and will not compromise on the principles of the free market, Treasury and Finance Minister Lütfi Elvan said on Monday, seeking to allay concerns that his government could introduce currency controls.
“The prerequisites for macroeconomic stability are price stability and financial stability,” Elvan said in a statement on his ministry’s website.
Turkey’s lira may suffer deeper losses in the coming weeks, opening the way to a possible currency crisis, French bank Societe Generale said in a report to clients. The lira is expected to weaken to 9.7 per dollar in the second quarter, it said.
“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,” Societe Generale strategist Phoenix 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.
On Sunday, Kavcıoğlu, a lecturer in banking and a former state-run bank executive, pledged to continue the battle against inflation, which stands at 15.6 percent. He said that the central bank’s next meeting on interest rates would be held as planned on April 15, appearing to rule out any immediate cut to interest rates.
The central bank 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 unorthodox policies helped Erdoğan engineer a borrowing boom to help offset the economic impact of the COVID-19 pandemic.
In 2018, the country plunged into a currency crisis as the economy overheated and after a spat between Erdoğan and former U.S. President Donald Trump over the detention of an American pastor.
Erdoğan hired Ağbal in early November after the lira hit the record low of 8.58 per dollar. Ağbal set about raising interest rates from 10.25 percent, winning praise from foreign investors. Turkey’s inflation rate is the highest in emerging markets after crisis-hit Argentina and is expected to nudge higher in the coming months.
“Erdoğan’s abrupt sacking of Ağbal marks a return to unorthodox policies that will fuel uncertainties, destroy investor confidence and ultimately trigger capital controls,” financial consultancy and research firm Eurasia Group said in a report to clients on Sunday.