The Turkish lira falls after Erdogan fired the head of the central bank

The turmoil comes after President Recep Tayyip Erdogan unexpectedly fired Naci Agbal on Friday, the central bank’s governor who has repeatedly raised interest rates in an effort to ease inflation since his appointment in November. Foreign investors say the move has renewed concerns that the central bank has lost its independence from political influence, diminishing the credibility of political decision-makers and reducing its appetite for Turkish assets.

The new governor, Sahap Kavcioglu, on Sunday tried to calm the markets, saying that easing inflation is the bank’s main objective. He also pledged to encourage economic stability by lowering borrowing costs and supporting growth. Money managers are worried that it could allow the currency to depreciate and accept high levels of inflation in order to reduce interest rates.

“We are really trying to assess the level of commitment to the pound,” said Simon Harvey, a senior foreign exchange market analyst at Monex Europe. “We know in Turkey that interest rates are politically sensitive.”

Turkey’s Borsa Istanbul 100 benchmark index fell as much as 9.4% on Monday, putting it on its sharpest selling price since June 2013 and triggering two trading stops. The fund traded on the iShares MSCI Turkey exchange listed on the Nasdaq decreased by 17.5% in premarket trading.

The turmoil in Turkey’s financial markets highlighted the risks of investing in emerging markets, but showed disappointing signs of overflow for the time being. The Mexican peso and the South African peso fell slightly against the dollar.

Shares of Spanish bank BBVA fell by more than 6% in Madrid. Turkey represents more than 10% of BBVA’s profit through its 49.9% stake in Turkish bank Garanti BBVA,

according to Jefferies.

The pound was one of the best performing currencies in emerging markets this year, while investors cheered on recent interest rate hikes. Money managers from abroad added a net stock of $ 4.6 billion to Turkish equities and local currency bonds during Mr Agbal’s tenure, betting that higher interest rates would help limit inflation and stabilize the pound.

Prior to Mr Agbal’s appointment to the central bank, investors had been selling Turkish assets for much of 2020 as low interest rates and high credit expansion boosted imports. The currency weakened, prompting several rounds of intervention to stabilize the pound, even as investors speculated that the currency would continue to depreciate. At one point, the central bank sold its own reserves and those borrowed from domestic banks to such an extent that it owed banks more reserves in foreign currency than it had.

Mr Kavcioglu, the fourth head of Turkey’s central bank in less than two years, is a former member of parliament for Mr Erdogan’s Justice and Development Party and a columnist for the pro-government newspaper Yeni Safak. He was publicly in favor of Mr Erdogan’s preference for lower interest rates.

Mr Agbal’s dismissal came after a rate hike on Thursday, which exceeded expectations and pushed credit rates to 19% from 17%.

The prospect of a renewed rate cut under Mr Kavcioglu raises concerns about the country’s prospects.

The cost of insuring Turkey’s government debt against defaults rose sharply on Monday, reaching an annual cost equivalent to $ 476,000 for every $ 10 million of bonds on a five-year contract. This is up from $ 306,000 at the close on Friday, according to IHS Markit, and is the highest since early November last year.

“It’s an equally complete surprise that I remember in over 20 years since I did this job,” said Paul McNamara, chief investment officer at GAM Investments in London, which manages emerging market debt funds. He has bet on the appreciation of the pound in recent months through forward foreign exchange contracts, which are contracts to buy or sell a currency at a predetermined rate on a specific date.

Mr McNamara said he expects high volatility in pounds this week, while he and other investors expect more clarity on Mr Kavcioglu’s policies.

Some investors have also grown concerned that Turkey will restrict its ability to sell local assets to stem market turmoil. Lütfi Elvan, Turkish Minister of Finance and Treasury, issued a statement on Monday indicating that Turkey would not impose capital controls or set a fixed exchange rate.

Any reduction in interest rates cannot be made immediately. In a statement on Sunday, Mr Kavcioglu said the program for monetary policy meetings, where reference rates are set, would remain unchanged. The next meeting will be on April 15.

“If you are determined to meet the meeting schedule, then you do not have a meeting this week to cut interest rates, so there is a short delay for investors,” said Kieran Curtis, an emerging markets fund manager at Aberdeen Standard Investments who had bought bonds in pounds under the mandate of Mr. Agbal.

“The next move will be final,” Curtis added. “The question was, when will the rates go down and how far.”

—Joanne Chiu, Jared Malsin and Paul J. Davies contributed to this article.

Write to Caitlin Ostroff to [email protected]