Turkey’s currency tumbled as much as 14 per cent after President Recep Tayyip Erdogan sacked the country’s central bank chief, who had been regarded as a crucial force in pulling the lira from historic lows.

The lira traded at around 8.4 against the US dollar early on Monday before cutting its losses to about 8 per cent at TL7.84 in London trading.

The country’s stock market was also under intense pressure, with the benchmark Borsa Istanbul 100 index sinking more than 9 per cent, triggering curbs meant to sooth jittery trading. Turkey’s local and foreign currency bonds dropped sharply, sending borrowing costs jumping.

The removal of Naci Agbal, announced in the early hours of Saturday, shocked many local and foreign investors who had applauded the official’s decisions to move Turkey towards a more orthodox monetary policy.

“Unwinding what was briefly appropriate macro policy is going to be painful,” said Edward Al-Hussainy, senior rates and currencies analyst at Columbia Threadneedle, adding that it would damage the appeal of Turkish assets.

Agbal’s appointment in November as part of a broader economic leadership shake-up helped spark a sharp rally in the lira, which was at one point the best performing emerging-market currency of 2021 after having plummeted to a historic low. The lira had recovered almost a fifth from its trough of around 8.58 to the US dollar on November 6 before Agbal’s removal.

The lira had gained last Thursday after Agbal increased interest rates by 2 percentage points, double what economists expected, on top of a 6.75 percentage point increase he oversaw last year.

Investors had long called for tighter monetary policy in Turkey to tame inflation that is running at more than 15 per cent and to quell strong outflows from foreign investors.

Ehsan Khoman, head of emerging markets research at MUFG Bank in Dubai, said that Agbal’s leadership and the central bank’s prudent measures had played a “pivotal role” in restoring confidence in the lira and Turkish assets.

Traders and analysts are concerned that Erdogan’s decision to install Sahap Kavcioglu to the role could rapidly erode the gains made during Agbal’s short tenure. Kavcioglu is a little-known professor of banking and a former lawmaker from the ruling Justice and Development party.

The new central bank head wrote in his column at the Islamist newspaper Yeni Safak last month that “interest rate increases will indirectly lead to an increase in inflation” — a view that runs counter to most modern macroeconomic theories, but is also espoused by Erdogan, a vocal opponent of high rates.

Robin Brooks, chief economist at the Institute of International Finance think-tank, said Turkey was at risk of “large” investor outflows, which would place pressure on the lira. Goldman Sachs warned on Sunday of “significant risks of a near-term discontinuous move weaker in the lira”.

The angst also bled on Monday into the fixed income market. Turkey’s dollar-denominated bond maturing in June 2031 tumbled in price to about 89 cents to the dollar on Monday, from 99.87 cents on Friday, pushing the yield up to 7.45 per cent. The country’s lira-denominated bonds also fell sharply, sending the yield on the benchmark 10-year to 16.2 per cent from 13.6 per cent at the end of last week.

Lutfi Elvan, Turkey’s finance minister, pledged on Monday to adhere to price stability and free-market principles.

“The macro policy framework that we are implementing and which ‘prioritises lowering inflation’ will continue until a permanent reduction in inflation is achieved,” Elvan said on Twitter. “We give extreme importance to the effective and healthy operation of markets”, he said.

Elvan’s statement came after Kavcioglu said on Sunday that the central bank “will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”.

The sudden change in Turkey’s monetary policy leadership came during a fraught moment for emerging markets, which have been under pressure as borrowing costs in the US and other developing markets have climbed higher. Last week, Russia and Brazil joined Turkey in increasing interest rates as they sought to keep a lid on inflation.

Additional reporting by Katie Martin and Hudson Lockett in Hong Kong