Published: Tue, July 09, 2019
Finance | By Loren Pratt

Lira sinks after Erdogan sacks Turkish central bank chief

Lira sinks after Erdogan sacks Turkish central bank chief

Will the new boss cut interest rates as Erdogan wants?

Balkans' peace, stability and welfare are "extremely important" for Turkey, President Recep Tayyip Erdogan said on Monday, ahead of his visit to Bosnia and Herzegovina.

The independence of the central banks from their governments is generally seen as important because it is a sign that they have the freedom to focus on what matters for their county's economy without being sidetracked by the political agenda of the day. Their guidelines are reasonably clear cut: An inflation target of 2 percent in the case of the European Central Bank and the Bank of Japan.

The Turkish lira dropped by 3% in early trading on Monday before recovering some of its losses.

But Cetinkaya has not lowered interest rates.

"The dismissal of Turkey's central bank governor over the weekend increases the chances of aggressive cuts in interest rates in the near-term", wrote Jason Tuvey, senior emerging markets economist at Capital Economics.

The Turkish president is getting desperate. At the time, the central bank raised interest rates sharply, from 17.75 % to the current 24% to support the currency and fight inflation.

One can argue that export-driven sectors like agricultural products, manufacturing and tourism benefit from a lower currency.

Turkey's economic growth has been largely dependent on foreign investors, yet decreasing the central bank's independence will make them less willing to put money into the country, hence making it harder to return to growth, he said. All three ratings agencies give Turkey a below investment grade rating. He also is convinced that interest rates are the work of the devil himself.

The firing comes at an especially sensitive time.

The governor's dismissal comes just days before Turkey is expected to take delivery of Russian air defence systems, triggering likely U.S. sanctions which could put the lira under renewed pressure.

The Turkish lira is now depreciating sharply at the start of the week.

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