Turkish President Recep Tayyip Erdogan fired three central bank policymakers on Thursday, two of whom were deemed to oppose the latest interest rate cut, paving the way for further policy easing and sending the lira to a new all-time low.
Analysts saw the move – announced at midnight in the Official Gazette – as new evidence of political interference by Erdogan, the self-described enemy of interest rates and who often advocates monetary stimulus.
With no explanation for the decision, the newspaper said, Erdogan dismissed conservative deputies Semih Tumen and Ugur Namik Kucuk, along with Abdullah Yavas, the longest-serving member of the Monetary Policy Committee.
He appointed two new members – Taha Kakmak as deputy and also Yusuf Tuna – little known in the central bank or among economists, leaving the MPC with little experience in monetary policy after long reforms by the president.
Two sources familiar with the internal deliberations said that Kucuk and Yavas were removed after disagreeing with the 100 basis point rate cut last month, which surprised investors at the time and sent the currency down.
On Thursday, the lira fell 1% to a record low of 9.1900 against the dollar after the announcement before paring losses.
The currency has fallen about 19 percent this year, primarily due to the central bank’s affected credibility and concerns among investors and savers about early interest rate cuts in the face of inflation that has soared to nearly 20 percent.
“The lira has lost its institutional support in recent years… last night’s changes strongly suggest that the central bank is no longer able to manage Turkey’s monetary policy,” said Arda Tunca, Ecofactoring Economist.
He added that the combination of monetary policy and financial regulations had left “the Turkish economy very fragile”.
Last month, the central bank cut the interest rate to 18 percent as Erdogan – who has fallen in opinion polls and has been eager to boost credit and exports – has publicly sought. Most analysts have called the easing a mistake at a time when global inflation is accelerating.
The MPC reform came after the presidency said Wednesday night that Erdogan had met Central Bank Governor Sahab Kavcioglu and posted a picture of the two men together.
This marked a turnaround from last week when Reuters, citing three sources, reported that Erdogan had lost faith in Kavcioglu and that the two had not communicated much in recent weeks.
Although the MPC has undergone a rapid transformation this year, Kavcioglu has pushed for changes in recent days, according to one of the sources familiar with the matter.
“Kavcioglu has somewhat paved the way to be able to cut rates more quickly with the new members,” the person said.
Erdogan appointed Kavcioglu as governor in March.
In just over two years, Erdogan abruptly fired three bank governors over political disagreements, a stunning display of political interference that has badly damaged the bank’s credibility and predictability.
“Removing central bank officials in the middle of the night without a very good explanation is not how to build central bank credibility or boost market confidence,” a foreign investor said on Thursday.
Turkey’s headline inflation hit a two-and-a-half-year high of 19.58 percent in September, while the core measure – confirmed by Kavcioglu over the past month – stood at 16.98 percent.
Kavcioglu told a parliamentary committee this week that the interest rate cut in September was not surprising and had little to do with the subsequent lira sell-off.
The next policy-setting meeting of the bank will take place on October 21, when another rate cut is likely.
The market’s response to Thursday’s changes included a jump in the premium demanded by investors for holding Turkish debt over safe-haven US Treasuries, based on the JPMorgan EMBI Global Diversified Index. It reached 521 basis points, the highest level since April, leaving spreads higher than those in Ukraine and Kenya.
The second source who spoke to Reuters said Kocuk and Yavas, who both missed the political meeting in September, had opposed some of the banks’ recent decisions.
Kucuk also opposed an unconventional policy in 2019-2020 of using the bank’s foreign exchange reserves to prop up the lira through state-bank sales, the person said, adding that Kucuk warned the MPC that failure to keep rates high enough now only leads to higher rates. . In the future.
Kakmak, the new deputy governor, has been deputy head of Turkey’s BDDK Banking Supervision Authority since 2019. Prior to that, he held positions at the state lender Ziraat Bank, including head of human resources.
Tuna, another MPC employee, was a professor and also served as a board member at BDDK from 2003-2009.
“It can be assumed that the newly appointed members of the Central Bank Committee will support the monetary policy of Kavcioglu and Erdogan,” said Antje Brevik, an analyst at Commerzbank. “This is not a good omen for the Turkish lira.”