Turkish banknotes. Photo: iStock
As the lira continues to depreciate, Turks are increasingly feeling the economic strain of their declining purchasing power. Photo: iStock

The Turkish lira collapsed more than 17% Monday 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 Monday, 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% as it looked to fight inflation.

Kavcioglu has written columns for a pro-government newspaper heavily criticizing 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.

Agbal was only 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 per dollar from 5.9 at the start of 2020 as past central bank managers kept interest rates low while inflation picked up.

Investors took fright at Friday’s move, which has thrown the independence of the bank into question and raised fears of a new bout of financial turbulence in the country.

“Erdogan’s decision to fire Governor Agbal, who had sought to instill some price stability and perception of Bank independence, now raises questions as to whether the new governor will look to lower rates while still aim to fight higher inflation,” said National Australia Bank’s Rodrigo Catril.