Turkey's lira plunged 15% to near its all-time low after markets opened after President Tayyip Erdogan's shock weekend decision to sack the central bank governor and install a like-minded critic of high interest rates.
The appointment of Sahap Kavcioglu, a former banker and ruling party lawmaker, in the early hours on Saturday marked the third time since mid-2019 that Erdogan has abruptly fired a central bank chief.
Kavcioglu had sought to ease concerns over a sharp selloff in Turkish assets and a pivot from rate hikes to cuts in a 90-minute call on Sunday.
He told Turkish bank CEOs he planned no immediate policy change, a source told Reuters.
"The lira is being smashed by investors fearing that the custodian of its value does not share their hopes for a stable currency underpinned by positive real interest rates," said Westpac senior currency strategist Sean Callow, adding that the lira may not yet have found a bottom.
"The real test will be when the volume comes in in Europe," he said.
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 Agbal, analysts said.
It could nudge Turkey toward a balance of payments crisis given its depleted buffer of its foreign exchange reserves.
One possible scenario would see the lira swing as much as 15% in both directions in today's European session as "TRY sets off on a roller-coaster ride driven by capital flight, central bank interventions and bargain hunters," SEB Research wrote in a client note.
Erdogan fired Agbal 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, Agbal had raised rates by 875 basis points to 19% and regained some policy credibility as the lira rallied from its nadir. But the currency gave back most of those gains in less than 10 minutes as the week's trade began.
On the call with Turkish bankers, Kavcioglu said any policy change would depend on lowering inflation, which he said was the primary goal, the source familiar with the call said.
Kavcioglu said the current policy approach would continue, the source added. The central bank did not immediately comment.
In a statement yesterday, Kavcioglu said the bank would focus on permanently lowering inflation, which has been stuck in double digits for most of the last four years.
A former member of parliament for Erdogan's AK Party (AKP), Kavcioglu has espoused the unorthodox views shared by the president.
He wrote high rates "indirectly cause inflation to rise," in a newspaper column last month.
Agbal's latest rate hike was 200 basis-points on Thursday which sparked a more than 3% lira rally.
But after Erdogan ousted Agbal, investors told Reuters they had worked through the weekend to predict how quickly and sharply Kavcioglu 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.
Concerns over central bank independence have exacerbated Turkey's boom-and-bust economy and record dollarisation, and prompted last year's unorthodox and costly policy of foreign exchange interventions, economists say.
The lira has lost half its value since a 2018 currency crisis.
Kavcioglu said in the statement that policy meetings will remain on a monthly schedule, suggesting any rate cuts may wait until the next planned meeting on April 15.