The Turkish lira and stocks fell after Turkish President Recep Tayyip Erdogan’s decision to replace Turkish Central Bank Governor Murat Cetinkaya over the weekend fueled concern that borrowing costs would be lowered faster than expected.
The currency declined more than 3 percent against the US dollar, the most since March, ending its world-beating rally over the past two months.
Timothy Ash, a strategist at BlueBay Asset Management in London, expects Turkish state banks to sell foreign currency.
Istanbul’s main stock index retreated the most in more than a month at the open.
Erdogan on Saturday dismissed Cetinkaya, undermining the central bank’s independence weeks before it is scheduled to decide on policy. Turkish Central Bank Deputy Governor Murat Uysal was named as a replacement.
After the decree, Erdogan told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher interest rates cause inflation, an official said.
He threatened consequences for anyone who defies the government’s economic policies, the official said.
The decision gives 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.
The lira touched a low of 5.8247 per US dollar during early Asian hours. As of yesterday morning, it was trading 2.5 percent weaker in Istanbul.
The Borsa Istanbul 100 Index fell 1.5 percent, led by Turkiye Garanti Bankasi AS and Akbank TAS. The drop in banking stocks dragged a gauge that tracks the securities down from the highest level since May last year.
Investors criticized 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 percent 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, adding: “We all know who really controls monetary policy now.”
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