A sharp fall in the Turkish Lira jolted global markets yesterday following the sacking of it central bank governor Naci Agbal and a controversial appointment of Sahap Kavcioglu. Mr Agbal had been credit with pulling the lira back from historic lows following several interest rate hikes to fight an inflation rate 15% and move Turkey to a more orthodox monetary policy.

Mr Agbal who had only been installed last November and was seen as an orthodox governor and one of the last remaining anchors in Turkey who held institutional credibility. Under his stewardship he raised interest rates to 6.75% to help fight the country’s 15% inflation rate. This saw a retracement of nearly 20% off its lows against the dollar and made it the best performing emerging market currency of 2021.

His replacement Mr Kavcioglu is a little-known professor of banking and a former lawmaker from the ruling Justice and Development party. He shares President Erdogan’s unorthodox view that high interest rates can fuel inflation. He wrote in a newspaper article in Turkey last month that “interest rates will directly lead to inflation,” which is of course back to front to monetary policy orthodoxy.

The Turkish government has attempted to calm markets with finance minister Lutfi Elvan pledging on Monday night that Turkey would adhere to price stability and free -market principles. He stated
“The macro policy framework that we are implementing and which ‘prioritises lowering inflation’ will continue until a permanent reduction in inflation is achieved. We give extreme importance to the effective and healthy operation of markets,”

Elvan’s statement came after Kavcioglu said on Sunday that the central bank “will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”.

Despite these comments markets are very concerned that this could cause a capital flight from Turkey and an undoing of the good work done previously by Mr Agbal. The Turkish lira fell as much as 17% against the Dollar before settling with a decline of about 10%. There was a similar price action against the pound.