The Turkish President, President Recep Erdogan, has terminated the appointment of the country’s Central Bank boss, Naci Agbal, for increasing the main interest rate to 19 percent, in order to assist the country fight inflation.
Erdogan, meanwhile, has appointed a former ruling party lawmaker and financial expert, Sahap Kavcioglu, as a replacement for the former apex bank boss that was relieved of his duties.
Agbal’s replacement was made barely 24 hours after he announced an increment in interest rate, a decision that was considered unfriendly and not in tune with the government’s plan.
Before his appointment, Kavcioglu had written columns criticising Agbal’s propensity to raise rates, a belief that was also said to have been shared by the president who believed that higher interest rates cause inflation.
“The shock decision by Turkey’s President Erdogan to sack central bank governor Naci Agbal late on Friday is likely to trigger large falls in the lira when markets open on Monday,” analyst Jason Tuvey of Capital Economics wrote in a research note.
“It looks like the central bank’s efforts to fight the country’s inflation problem may come to an end, and a messy balance of payments crisis has become (once again) a real possibility,” Tuvey warned.
Agbal was appointed during an economic team overhaul that Erdogan engineered in November to halt a steep Turkish currency slide.
The lira had by then fallen to 8.5 to the dollar from 5.9 at the start of 2020 as past central bank managers kept interests rates low while inflation gathered pace.
Economists at Goldman Sachs estimated that the central bank spent more than $100 million in 2020 alone buying up foreign currencies in an attempt to support the lira.
But Turks kept stocking up on gold and exchanging liras for euros and dollars to preserve their saving, even after foreign investors had abandoned the market and the economy appeared headed for a major crisis.
Erdogan appeared to concede defeat and embrace orthodoxy by installing Agbal at the central bank and reformists at the finance ministry in the November reshuffle.
Agbal’s term has seen the lira, the country’s currency stabilise. It stood at around 7.3 against the dollar before his sack.
But the lira began to reverse some of its earlier gains in February and the annual inflation rate rose to 15.6 percent due to external pressure on the Turkish economy.
Agbal’s decision to raise rates by a greater than expected 200 basis points to 19 percent on Thursday was cheered by investors but appeared to be the last straw for Erdogan.