The appointment of Sahap Kavcioglu, a former banker and ruling party lawmaker, in the early hours on Saturday marked the third time since mid-2019 that Erdogan has abruptly fired a central bank chief.
Kavcioglu sought to ease concerns about a sharp selloff in Turkish assets and a pivot from tight to loose policy, telling bank CEOs on Sunday he planned no immediate policy change, a source told Reuters.
The currency tumbled to as weak as 8.4850 versus the dollar, from 7.2185 on Friday, back to levels touched in early November when it reached an intraday record of 8.58. It recovered about half of those losses after Finance Minister Lutfi Elvan said Turkey would stick to free market rules, reaching 7.76 at 0620 GMT, 7 per cent weaker from Friday.
Goldman Sachs and others had expected a sharp dive in the lira and Turkish assets given the new governor’s dovish and even unorthodox views, and what was seen as the latest damage to the bank’s credibility amid years of policy interference that has dogged the major emerging market economy.
The weekend overhaul could soon reverse the hawkish steps taken by predecessor Naci Agbal, analysts said, and nudge Turkey toward a balance of payments crisis given its depleted buffer of FX reserves. Turkey “will be left with two choices, either it pledges to use interest rates to stabilise markets, or it imposes capital controls,” said Per Hammarlund, senior EM strategist at SEB Research.
Finance Minister Elvan said authorities were determined to stick to free-market rules and a free-floating currency regime. He said in a statement the macro policy framework would continue until there is a lasting fall in inflation.
Erdogan fired Agbal two days after a sharp rate hike that was meant to head off inflation of nearly 16 per cent and a dipping lira. In less than five months on the job, Agbal had raised rates by 875 basis points to 19 per cent and regained some policy credibility as the lira rallied from its nadir.