Turkish lira weakens 2.1pc after cenbank governor sacked

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The euro was flat at US$1.1226, not far from a 2-1/2-week low of US$1.1205 touched on Friday.

The lira pared some of its losses to last hold near 5.7401.

As Asian markets opened on Monday, the Turkish Lira lost 3% against the dollar, with traders reacting to a surprise move by the President of Turkey on Saturday to fire the Governor of the Bank of Turkey, Murat Cetinkaya. The following circumstance shows that this was not a "usual consensual separation".

Central bankers were the rock stars of high finance in the aftermath of the financial crisis of 2008. Normally there is a message + nice statements to say goodbye. Central bankers have to look further and ensure the economy does not overheat.

President Tayyip Erdogan sacked Cetinkaya for refusing the government's repeated demands for rate cuts, raising questions about central bank independence.

Cetinkaya was a close political ally of Berat Albayrak, the Ministry of the Economy and President Erdogan's son-in-law and drew criticism past year for failing to raise interest rates fast enough to hold back galloping inflation.

However, in September previous year, Turkey increased its benchmark interest rate from 17.5% to 24%.

Comment from our side: The mechanism works exactly the other way round. With rising interest rates inflation can usually be contained, as it has happened in Turkey in recent months (see here).

Akmehmet stated that the firing would lead to the perception that Turkey's economic policy was following Erdogan's will, going against the long-standing principle that a central bank should be independent. His decision to replace the Turkish Central Bank's Governor over the weekend has backfired with the lira taking a tumble. Even if the new boss explicitly emphasises the independence of the central bank in his statement!

Cetinkaya did not want to cut interest rates. Or else, how will the new guy decide on 25th of July? Erdogan has previously called high interest rates as "mother and father of all evil".

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