Turkish Lira
The currency weakened the most since March during the early hours of trading in Asia to 5.8247 per dollar. Image Credit: Reuters

Istanbul: The lira slumped after President Recep Tayyip Erdogan’s shock decision to replace Turkey’s central bank governor over the weekend fuelled concern the regulator will lower borrowing costs faster than expected.

The currency fell 2.1 per cent to 5.7514 per dollar as of 8.35am in Istanbul on Monday, ending its world-beating rally over the past two months. It weakened the most since March during the early hours of trading in Asia to 5.8247 per dollar. Timothy Ash, a strategist at BlueBay Asset Management in London, expects Turkish state banks to sell foreign currency.

Erdogan dismissed Murat Cetinkaya on Saturday, potentially undermining the central bank’s independence weeks before it’s scheduled to decide on policy. Deputy Governor Murat Uysal was named as a replacement.

After the decree came out, Erdogan told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher interest rates cause inflation, according to an official who was present. He also threatened consequences for anyone who defies the government’s economic policies, the official said.

The decision gives bears the justification they needed for keeping bets against the currency at the highest in the world, in spite of the lira’s rally since early May through Friday, according to risk reversals.

“Given that his controversial decision caused a sharp fall in the value of the Turkish lira in the early hours of trading on Monday, the central bank will make a major policy mistake if it cuts rates by a few hundred basis points on July 25,” Rabobank strategists, including Hong Kong-based Michael Every, wrote in a report.

Investors criticised Cetinkaya, appointed governor in April 2016, for tightening monetary policy too slowly during a currency rout in August. He eventually showed resolve, increasing the benchmark interest rate by 625 basis points in September to 24 per cent and holding it there ever since.

Cetinkaya’s “crime” was to refuse to cut rates, Win Thin, New York-based head of currency strategy at Brown Brothers Harriman & Co., wrote in a note. “We all know who really controls monetary policy now.”