Erdogan pockets another cenbank leader after Turkey’s sharp rate hike

ISTANBUL (Reuters) – President Tayyip Erdogan abruptly accused the head of Turkey’s central bank on Saturday, two days after a sharp interest rate hike to curb inflation, a ruling party lawyer and criticizing a tight monetary policy.

This was the third time since mid-2019 that Erdogan – who has repeatedly called for several levels – has fired a bank regulator. Analysts predicted that the lira would fall when markets reopened while the bank’s credit received another blow.

Outgoing governor Naci Agbal, who was appointed less than five months ago, won market praise by strongly raising the policy rate by 875 basis points to 19%, the the highest rate of any major economy.

The shock withdrawal, announced in the early hours of Saturday, comes after the bank took interest rates by 200 points more than expected on Thursday in a “face-loaded” move. reversing inflation nearly 16% and lira dipping.

The country’s Official Gazette announced that Erdogan had replaced Sahap Kavcioglu, a former MP for Erdogan’s AK Party (AKP). The former banker has publicly criticized Agbal’s hawkish policy.

“While interest rates are close to zero in the world, choosing a rate hike for us will not solve economic problems,” he wrote in a column in Yeni Safak’s newspaper last month.

Raising rates “indirectly causes inflation to rise,” he said – reflecting Erdogan’s neutral view of the monetary economy, which has been a key emerging market economy for years.

Lack of monetary independence has contributed to Turkey’s growth and rise in the dollar, and has helped keep inflation in double numbers for most of the past four years. , economists say. The unique lira has lost its value since 2018.

“This means that the government will once again try to stimulate the economy with low-level policies,” said Selva Demiralp, director of the Economic Research Forum of Koc-TUSIAD University, in Istanbul.

“Such a high priority has the potential to go backwards by putting a lot of pressure on the lira and contracting the economy longer,” she said.

TURNOVER RAPID

Kavcioglu, the fourth head of a central bank in five years, is well-known among local bankers but little among mainstream economists and foreign investors.

Prior to his election in 2015 at the AKP stronghold of northeastern Turkey, he was deputy general manager of state-owned lender Halkbank as part of a more than 25-year career in banking.

A trader at one local bank expected Kavcioglu to impose a rate cut before the next scheduled policy meeting in April.

“There is a real chance now that Turkey is facing a balance of payments crisis,” Jason Tuvey, an analyst at Capital Economics, wrote in a note.

Since Agbal’s inauguration on November 7, the lira had bounced back more than 15% from a record low of above 8.50 to the dollar. Some $ 20 billion of foreign assets also went into Turkish funds, going back years of outflows.

But even Erdogan reluctantly appointed Agbal as part of what he called a new market – friendly economic era, the president continued to push for lower rates. Announcing reforms this month, he said price stability should be “put on hold”.

Early on Saturday, Agbal thanked Erdogan on Twitter “for all the posts he found relevant to me and that have put me in office to this day … I am also thankful for my removal as today. ”

Agbal, who was also a long – time AKP member, was regularly retested to get inflation down to a 5% target by the end of 2023 and promised to walk again if needed.

“If you abandon a strict policy stance … at an early stage, past experiences show that inflation will move up again,” Agbal told Reuters last month in the first interview. as governor.

The withdrawal follows the bank’s quick turnaround.

In July 2019, Erdogan accused governor Murat Cetinkaya of not swiftly bringing flat rates down. He fired Cetinkaya’s agent, Murat Uysal, in November last year after the lira fell to a low.