The Turkish lira and stocks plunged Monday as officials tried to stem the carnage caused by President Recep Tayyip Erdoğan’s abrupt dismissal of his reformist central bank chief, Agence France-Presse reported.
The lira lost nearly 15 percent against the dollar on the first day of trading after Erdoğan replaced market-friendly economist Naci Ağbal with former ruling party lawmaker Şahap Kavcıoğlu at the crucial post.
It clawed back some of its losses but was still down nearly nine percent at 7.90 to the dollar after analysts said the central bank intervened to support the lira by selling foreign currencies.
The turmoil carried over to the İstanbul stock exchange.
The Borsa İstanbul suspended trading twice when automatic circuit breakers kicked in as the broad market selloff approached eight percent.
Yields on Turkish bonds rose to record highs and people on the streets worried about their savings being wiped out by Erdoğan’s decision to fire the man credited with righting the economy in his four months on the job.
“Supporting the government doesn’t mean turning a blind eye to its mistakes,” Şükrü Koçak, 36, said on his way to work in downtown İstanbul.
“If mistakes are made, they must be pointed out.”
Short reign
The strong market reaction underscored the trust Ağbal had won from investors after years of what many Western analysts view as mismanagement by Erdoğan’s economic teams.
Erdoğan is known for his unconventional belief that high interests cause inflation — instead of tamping it down — and has placed a heavy emphasis on keeping them low to support growth.
The result saw the Turkish economy expand by 1.8 percent last year despite the economic pain of the coronavirus pandemic.
But the annual inflation rate also shot up to 15.6 percent by February and the Turkish lira lost nearly a third of its value against the dollar from the start of 2020 to the day of Ağbal’s appointment in November.
He used his term to aggressively raise the main interest rate and promise to keep it high for as long as needed.
Erdoğan appeared to grudgingly accept the policy change.
He committed himself to market reforms — unveiling a long-promised package of improvements aimed at winning over investors — while still saying that he personally opposed high rates.
But Ağbal’s decision to hike the main rate by a greater than expected 200 basis points to 19 percent last Thursday appeared to be the last straw for Erdoğan.
Ağbal’s replacement Kavcıoğlu had written columns for the pro-government Yeni Şafak newspaper arguing that high policy rates “indirectly” caused inflation.
Yeni Safak criticized Ağbal on its front page on Friday and later that day Erdoğan signed a decree changing his central bank governor for the third time in two years.
Worries on the street
Turkish officials tried their best to reassure the markets in a series of statements over the weekend and Monday.
“There will be absolutely no move away from the free market mechanism,” Finance Minister Lütfi Elvan said.
“We will continue with determination to implement the liberal exchange system.”
Kavcıoğlu himself said Sunday the central bank will “continue to use monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”.
But economists worry that Kavcıoğlu’s means of fighting inflation involves bringing the main interest rate down.
Citizens on the streets of Istanbul meanwhile worried about rising unemployment — officially registered at 13.2 percent at the end of 2020 — and their liras being able to buy less in stores.
“Of course all this affects us,” said Ahmet, 60, who is unemployed.
“We can’t even find a job anymore. And when we go out shopping, the prices are constantly changing. I really don’t know what will happen to us.”