Turkey's lira slid 15% to a near all-time low on March 22 after President Recep Tayyip Erdoğan's shock weekend ousting of a hawkish Central Bank governor sparked fears of a reversal of recent rate hikes, before clawing back some overnight losses.
The appointment of Şahap Kavcıoğlu, a former banker and ruling party lawmaker, in the early hours on March 20 marked the third time since mid-2019 that Erdoğan has abruptly fired a Central Bank chief.
Kavcıoğlu sought to ease concerns about a sharp selloff in Turkish assets and a pivot from tight to loose policy, telling bank CEOs on March 21 he planned no immediate policy change, a source told Reuters.
The currency tumbled to as weak as 8.4850 versus the dollar, from 7.2185 on March 19, back to levels touched in early November when it reached an intraday record of 8.58.
It recovered about half of those losses after Finance Minister Lütfi Elvan said Turkey would stick to free market rules, reaching 7.76 at 0620 GMT, 7% weaker from March 19.
Goldman Sachs and others had expected a sharp dive in the lira and Turkish assets given the new governor's dovish and even unorthodox views, and what was seen as the latest damage to the bank's credibility amid years of policy interference that has dogged the major emerging market economy.
The weekend overhaul could soon reverse the hawkish steps taken by predecessor Naci Ağbal, analysts said, and nudge Turkey toward a balance of payments crisis given its depleted buffer of FX reserves.
Turkey "will be left with two choices, either it pledges to use interest rates to stabilize markets, or it imposes capital controls," said Per Hammarlund, senior EM strategist at SEB Research.
Finance Minister Elvan said authorities were determined to stick to free-market rules and a free-floating currency regime. He said in a statement the macro policy framework would continue until there is a lasting fall in inflation.
Erdoğan fired Ağbal two days after a sharp rate hike that was meant to head off inflation of nearly 16% and a dipping lira.
In less than five months on the job, Ağbal had raised rates by 875 basis points to 19% and regained some policy credibility as the lira rallied from its nadir.
Cristian Maggio, a strategist at TD Securities said the overhaul "demonstrates the erratic nature of policy decisions in Turkey, especially with regard to monetary matters [and risks] looser, unorthodox, and eventually mostly pro-growth policies from now on."
On the call with Turkish bankers, Kavcıoğlu said the current policy would continue and any change would depend on lowering inflation, which he said was the primary goal, the source familiar with the call said.
The Central Bank did not immediately comment on the call. In a statement on March 21, Kavcıoğlu said the bank would focus on permanently lowering inflation, which has been stuck in double digits for most of the last four years.
Kavcıoğlu said policy meetings will remain on a monthly schedule, suggesting any rate cuts may wait until the next planned meeting on April 15.
A former member of parliament for Erdoğan's ruling Justice and Development Party (AKP), Kavcıoğlu has espoused the unorthodox views shared by the president. He wrote high rates "indirectly cause inflation to rise," in a newspaper column last month.
Weekend of questions
Ağbal's final rate hike was 200 basis-points on March 18 which sparked a more than 3% lira rally.
His hawkish stance dramatically cut Turkey's CDS risk gauges and started to reverse a years-long trend of funds abandoning local assets.
But after Erdoğan ousted Ağbal, investors told Reuters they had worked through the weekend to predict how quickly and sharply Kavcıoğlu might cut rates - and how much the currency would retreat.
Wall Street bank Goldman told clients it was reviewing investment recommendations and predicted a "discontinuous" drop in the lira, and a "front-loaded" rate-cutting cycle.
The overhaul meant capital outflows appeared likely and a rapid adjustment in the current account may be necessary since markets would shy away from funding Turkey's chronic deficits, it said.
The lira has lost half its value since a 2018 currency crisis.