President Recep Tayyip Erdogan’s dismissal of Turkey’s central bank governor, Naci Agbal, on March 20, just four months after his appointment, has rocked market confidence. On Monday March 22, the first trading day after the dismissal, the Turkish lira slid in value by as much 14% and the country’s stock market also saw a dramatic fall.
Mr Agbal’s sacking will undermine hopes that Turkey had been returning to a more conventional approach to monetary policy. His short tenure had seen increases in interest rates, including an increase to the benchmark interest rate of two percentage points just two days before his dismissal.
Such moves had won plaudits internationally as being necessary to bring inflation down. However, Mr Erdogan appears to have taken a contrary view and has replaced Mr Agbal with academic Sahap Kavcioglu, who is known to be of the view that “interest rate increases will indirectly lead to an increase in inflation”.
Further economic instability is bad news for Turkey’s banks, which have struggled in recent years. Pre-tax profits at all five of Turkey’s largest banks fell between 2017 and 2019, alongside key measures of profitability, such as return on equity. Recent data from the country’s banking watchdog has been more promising, however, showing increased profits year-on-year in recent months.
