Turkish lira crashes after Erdogan sacks central bank chief

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·2 min read
ANKARA, TURKEY - MARCH 16: Turkish President Recep Tayyip Erdogan and Chairman of Bosnia and Herzegovina Presidential Council Milorad Dodik (not seen), and members of the Presidential Council of Bosnia and Herzegovina attend an agreement signing ceremony between the two countries, after their meeting at the Presidential Complex in Ankara, Turkey on March 16, 2021. (Photo by Dogukan Keskinkilic/Anadolu Agency via Getty Images)
Turkish President Recep Tayyip Erdogan. Photo: Dogukan Keskinkilic/Anadolu Agency via Getty Images

International investors have pulled their money out of Turkey after the country's president fired the head of its central bank.

The Turkish lira dropped as much as 16% against the euro (TRYEUR=X) over the weekend and Turkish stocks sold-off on Monday after the shock firing.

The Turkish lira dropped sharply after the shock firing. Photo: Yahoo Finance UK
The Turkish lira dropped sharply after the shock firing. Photo: Yahoo Finance UK

Turkish President Recep Tayyip Erdogan dismissed central bank chief Naci Agbal on Saturday, two days after Agbal had increased Turkey's interest rate by 200 basis points.

The higher-than-expected interest rate hike was seen as a sensible move by financiers. JP Morgan said investors would be "relived" by the "bold" move, which would help to restore "policy credibility".

However, the rate hike appears to have fallen foul of President Erdogan.

"President Tayyip wants a lower interest rate in the country so that economic growth can pick up more steam," said Naeem Aslam, chief market analyst at Avatrade. "But of course, a sudden decision like the one made over the weekend surprised the market, and a move like the one we are experiencing today becomes inevitable."

Sebastian Galy, a senior macro strategist at Nordea, said: "Faced with inflation and a weak external position, the governor was tightening monetary policy. Many expected this to reverse ahead of next year’s presidential elections but not so soon, hence the abrupt surprise."

Agbal only lasted four months in the job and is the third central bank chief to be dismissed in two years.

The lira was down 9.5% against the euro on Monday morning. The flagship Turkish stock market (XSIST.IS) dropped over 9% in Istanbul.

The flagship Istanbul stock market also crashed. Photo: Yahoo Finance UK
The flagship Istanbul stock market also crashed. Photo: Yahoo Finance UK

President Erdogan has replaced Agbal with Sahap Kavcioglu, who was described by the Financial Times as "a little-known professor of banking and a former lawmaker from the ruling Justice and Development party".

"The new governor promises permanent price stability but also believes as president Erdogan does that interest rates lead to inflation, against economic orthodoxy," Galy said. "The next meeting is set for the 15th of April where at least 2% in interest rate cut is to be expected."

Watch: Turkey's Lira Plunges After Central Bank Upheaval