Turkey’s economy has been thrown into renewed turmoil after President Recep Tayyip Erdoğan ousted the head of the country’s central bank after raising interest rates to deal with high inflation.
The Turkish lira fell nearly 15% on Monday, and the Istanbul stock exchange lost 10 percent of its value after the president shocked global investors by replacing party loyalist Naci Ağbal.
The currency regained some ground for trading about 8% lower against the U.S. dollar, after Turkish finance minister Lütfi Elvan issued a statement saying the country would continue to prioritize for free market policies – seen by global investors as a sign that the country would stop using capital controls.
Ağbal will replace Şahap Kavcıoğlu, a former MP for Erdoğan ‘s ruling Justice and Development Party (AKP).
Ağbal had won market praise since his inauguration in November for combating high inflation rates by steadily raising interest rates by 8.75 percent to 19%, the highest among economies large, including a 2-point increase last week.
Turkish inflation is running at more than 15%, three times the central bank’s target rate, driven by rising global oil prices as financial investors pledge faster economic recovery from Covid- 19. Despite what was sold on Monday, the lira is still above the level it was against the dollar when Ağbal first took the lead.
Central banks around the world use higher borrowing costs in an effort to curb inflation. However, Erdoğan has previously stated that high interest rates fuel higher inflation, contrary to mainstream macroeconomic opinion, and he has pressed the country ‘s economy to continue to grow with the help of cheaper loan costs.
However, analysts warned that a number of leadership changes at the central bank in recent years weakened their authority and raised doubts about their commitment to tackling inflation.
Ağbal is the third governor fired in less than two years, sharing the fate of his predecessor, Murat Uysal, who was blamed for the sale in the lira after he stood for the against raising interest rates, and Murat Çetinkaya, which was submitted in July 2019 to keep interest rates too high.
Maya Senussi, a senior economist at advisory group Oxford Economics, said the sale in Turkish currency, stock market and other related assets, including bonds, reflected investors’ concerns about issuing Ağbal.
“Not only does it appear to reflect a premature easing of policy in the short term, the [central bank] Leadership has now too often been removed once, leaving the bank with no credit, ”she said.