ANKARA, Turkey 鈥� The Turkish currency plummeted against the U.S. dollar on Monday after President Recep Tayyip Erdogan fired his third central bank head in less than two years, raising concerns about a possible return to the unconventional monetary policy
Over the weekend, Erdogan dismissed Naci Agbal, who had shored up the lira currency and investor confidence with a strong dose of higher interest rates since being appointed in November.
Agbal was replaced by Sahap Kavcioglu, a banking professor who has argued for lower rates. Kavcioglu鈥檚 stance is in line with Erdogan鈥檚 stated preferences, but in contradiction to the usual economic thinking.
Typically, higher interest rates shore up a currency and help combat inflation. Erdogan has argued the contrary, that high rates cause inflation.
The market selloff in the lira and Turkish stocks reflect investor fears that interest rates are headed lower, said Maya Senussi, senior economist at Oxford Economics. She wrote in a research note that the Turkish central bank leadership 鈥渉as been removed once too often, leaving the bank with no credibility鈥� and that a surprise rate hike Thursday, 鈥渨hich we took as a good omen, appears to have overstepped President Erdogan鈥檚 tolerance limits.鈥�
Higher rates, while they support the currency and battle inflation, can constrain economic growth by raising the cost of borrowing for companies. Despite currency difficulties since mid-2018, Turkey was one of the few countries to post economic growth during 2020, thanks to government stimulus, tax breaks and cheap credit from state-owned banks.
Growth in recent years, however, has been fueled by foreign credit and government stimulus, leaving the economy vulnerable, according to the International Monetary Fund.
The lira was trading Monday at around 7.9 against the dollar 鈥� nearly 10% down from Friday鈥檚 close. It had been weaker earlier Monday at 8.4 per dollar but recovered some of it losses after Finance Minister Lutfi Elvan assured markets that Turkey was committed to free market rules and to a liberal currency exchange regime. The currency has fallen from levels around 4 to the dollar since April 2018.
Agbal, a respected former finance minister, was brought in to lead the central bank after the Turkish lira hit record lows and inflation soared. In his months in office, Agbal had hiked the benchmark rate a total of 8.75 percentage points, working to rebuild the credibility of the central bank after it was damaged by years of unorthodox policies. Agbal鈥檚 most recent hike of 2 percentage points on Thursday took the rate to 19%, which was higher than analysts expected. The bank said tight monetary policy would be maintained until inflation, which has hit 15.61%, was brought under control.
Kavcioglu is a banking professor and a columnist at a pro-government newspaper, where he has argued for low interest rates. He previously was a lawmaker in Erdogan鈥檚 ruling party.
Ratings agency Moody's said that the decision 鈥渋ncreases the risk of renewed pressure on the exchange rate. The surprise move is also further evidence of the complete lack of policy predictability in Turkey and confirms our view of serious institutional weakening in the country over the past several years.鈥�
Suzan Fraser And David McHugh, The Associated Press
