The Turkish lira has fallen by 15 percent after President Recep Tayyip Erdogan dismissed respected central bank governor Naci Agbal in a shock move at the weekend. 

Yields on government and dollar bonds soared, while an 8 percent fall on the Borsa Istanbul Index briefly triggered a halt in trading just before 10 a.m. local time. 

Agbal who had been in office for just four months, presided over a 200 basis points rise in interest rates last week, which pushed the cost of borrowing in Turkey to 19 percent, in a bid to tame the country's runaway inflation problem. 

In response to his ousting, made by presidential decree in the early hours of Sunday, Agbal tweeted: "I express my gratitude for my dismissal from duty as of today. May God grant us all good luck." 

He is the third central bank governor to be sacked in two years. His replacement, Sahap Kavcioglu, is a professor of banking and a former politician with Erdogan's ruling Justice and Development Party (AKP). 

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Consumer prices in Turkey were up by 15 percent on an annualized basis in February. An avowed opponent of high borrowing costs, which he sees as a drag on growth, Erdogan has favored low rates to promote manufacturing and exports in the COVID-19-hit economy.

With bank reserves running low and the pandemic likely to severely impact Turkey's lucrative tourist industry this summer, analysts say the AKP appears to be once again aiming to stimulate production as an alternative.   

In a move to reassure investors, Finance Minister Lutfi Elvan issued a statement, saying: "There will be absolutely no move away from the free-market mechanism ... We will continue with determination to implement the liberal exchange system."

However, the sharp fall in the lira has raised concerns over the impact on European banks with significant exposure to the Turkish economy. Shares in Spain's BBVA, the Dutch lender ING and Italy's UniCredit were down between 3 and 4 percent as European markets opened, while Turkish five-year credit default swaps rose to a five-month high. 

With snap elections before the end of the year looking likely, Timothy Ash, an analyst with BlueBay Asset Management, told CGTN Europe that strengthening foreign exchange policy is key.  

"In the short term, the emphasis will be on keeping FX [foreign exchange] well anchored, but in the longer term, who knows? It is certainly going to be challenging and there is pain ahead. The sacking of Agbal has taken the markets by surprise. Some more warm comments from government ministers may help stabilize markets."

Elsewhere, questions have been raised over whether Turkey may act to impose capital controls to prevent a further outflow of assets. There has been an exodus of private capital from the country over recent years, as individuals pull out of the lira and put their savings in overseas property, dollars, gold and increasingly bitcoin as an alternative. It has been estimated that more than one in 10 of the country's millionaires has left Turkey since 2017. 

Ash said this may be a step too far for now. "At the end of the day, the AKP is a pro-business party. Controls would be a forced action, but they remain in the tool kit."