ISTANBUL: A currency exchange office worker counts Turkish Lira banknotes in front of an electronic panel displaying currency exchange rates at an exchange office in Istanbul. – AFP

ANKARA: Turkish officials yesterday tried to calm the turmoil triggered by President Recep Tayyip Erdogan’s abrupt decision to sack his reformist central bank chief, insisting they would stick with free market rules. The lira lost as much as 17 percent against the dollar on the first day of trading after Erdogan replaced market-friendly economist Naci Agbal with former ruling party member Sahap Kavcioglu at the key post.

The Turkish lira collapsed more than 17 percent yesterday after President Recep Tayyip Erdogan sacked the country’s market-friendly central bank chief. The currency fell to as low as 8.47 per US dollar in early trade, having closed at 7.22 at the end of last week, after Naci Agbal was replaced by former ruling party lawmaker Sahap Kavcioglu at the weekend.

It later recovered slightly to sit at 8.09. While a presidential decree on Friday did not explain why Agbal had been removed, it came just a day after the bank hiked interest rates more than two percentage points to 19 percent as it looked to fight inflation. Kavcioglu has written columns for a pro-government newspaper heavily criticising Agbal’s propensity to raise rates. Analysts say the new central banker subscribes to Erdogan’s unorthodox belief that higher interest rates cause inflation. Most economists believe it slows inflation down by raising the cost of doing business.

The currency clawed back some of its losses and was down roughly eight percent at 7.85 to the dollar after analysts said the Turkish central bank intervened to support the lira by selling foreign currencies. The carnage on Turkish financial markets carried over to the Istanbul stock exchange. The Borsa Istanbul suspended trading for 35 minutes after automatic circuit breakers kicked in when an early sell-off approached seven percent.

Finance Minister Lutfi Elvan issued a statement early yesterday to try and reassure investors. “There will be absolutely no move away from the free market mechanism,” Elvan said in a statement. “We will continue with determination to implement the liberal exchange system.” Elvan also reiterated Turkey’s commitment to fighting inflation which has been gathering pace for months. Consumer prices were up by 15.61 percent on an annualized basis in February.

Short reign
The lira was changing hands at around 7.22 to the dollar before Agbal was sacked last week after less than five months on the post. He was appointed after Erdogan dismissed his predecessor and the president’s son-in-law Berat Albayrak resigned as finance minister in November. The change to the finance team offered hope to the markets that Turkey would tread a more orthodox path, hiking interest rates to combat inflation. Erdogan’s decree did not provide a reason for Agbal’s dismissal, but the move came two days after the central bank raised its benchmark interest rate by a larger-than-expected 200 basis points to 19 percent.

While the hike was welcomed by the markets, pro-government newspapers and a columnist close to Albayrak targeted Agbal on Friday. Erdogan often rails against high interest rates, subscribing to the unconventional belief that they cause inflation instead of control it. He once even dubbed them the “mother and father of all evil”. The new bank governor Kavcioglu is a former ruling party lawmaker and columnist for the pro-government Yeni Safak newspaper.

Just last month he echoed Erdogan’s thinking, writing that higher interest rates “indirectly” lead to higher inflation. Already nominally independent, Kavcioglu’s appointment throws further doubt about the central bank’s powers to ensure price stability and raise interest rates if needed under Erdogan. Kavcioglu is the bank’s fourth governor in two years after similar dismissals. In a statement on Sunday, he sought to reassure the markets over the bank’s commitment to fighting inflation. The bank “will continue to use monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation,” Kavcioglu said. – AFP