Minister reiterates commitment to free market mechanism as Turkish lira slides

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The Turkish lira plunged against the US dollar following President Recep Tayyip Erdoğan's decision to replace the Central Bank governor early Saturday (March 20).

The sacking came after an interest rate hike and Governor Naci Ağbal was replaced with Şahap Kavcıoğlu, a pro-government economist advocating lower interest rates.

While the US dollar's exchange rate to lira was 7.21 at the end of last week, it exceeded 8.40 as markets opened. Dollar was traded at 7.86 as of 10.10 a.m. local time (7.10 a.m. GMT).

Following the lira's slide, Minister of Treasury and Finance Lütfi Elvan released a statement, reiterating Turkey's commitment to the free-market economy.

Attaching great importance to the markets' efficient and solid functioning, Turkey will not compromise from the free-market mechanism, he said. "Liberal exchange regime will continue resolutely."

Elvan stressed that Turkey would maintain its macro policy, prioritizing disinflation with determination until a permanent drop in inflation is achieved.

"We will continue implementing fiscal policies to support price stability in a way that complements monetary policy," Elvan noted.

Monetary policies

The head of the Central Bank was changed three times in 20 months. New Governor Kavcıoğlu released a message yesterday, saying that the bank "will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation."

"The decline in inflation will foster macroeconomic stability through the fall in country risk premiums and a permanent improvement in financing costs, and will contribute to the development of conditions essential for sustainable growth that will enhance investment, production, exports and employment.

"Accordingly, Monetary Policy Committee Meetings will be held as previously scheduled and announced to the public. In line with the transparency and predictability principles in policies, communication channels will be used effectively to address all the stakeholders."

Erdoğan's interest rate-inflation theory

President Erdoğan has long opposed higher interest rates, which he claims cause higher inflation.

Ağbal's appointment as the Central Bank in November, as well as his son-in-law Berat Albayrak's replacement with Lütfi Elvan as the finance minister, was perceived as a step back from this unconventional theory as the Central Bank has raised the policy rate by a cumulative 875 basis points since then. (TP/VK)