Turkish President Tayyip Erdogan on Thursday sacked three central bank policymakers, two of whom opposed the latest interest rate cut, paving the way for further policy easing and sending the pound to a new all-time low .
Analysts saw the move – announced at midnight in the Official Gazette – as further evidence of political interference by Erdogan, a self-proclaimed interest rate enemy who frequently calls for a monetary stimulus.
Without an explanation for the decision, Erdogan sacked vice-governors Semih Tumen and Ugur Namik Kucuk, as well as the senior monetary policy committee (MPC) member Abdullah Yavas, the gazette said.
He appointed two new members – Taha Cakmak as an MP and Yusuf Tuna – who are little known at the central bank or among economists, leaving the MPC with little experience in monetary policy after a years-long overhaul by the president. .
Two sources close to the internal deliberations said Kucuk and Yavas were pulled after they disagreed with last month’s 100 basis point rate cut, which at the time surprised investors and caused the currency to fall.
On Thursday, the pound weakened as much as 1% to a record low of 9.1900 against the dollar after the announcement before cutting losses.
The currency has lost around 19% this year, mainly due to the damaged credibility of the central bank and concerns among investors and savers about premature rate cuts in the face of inflation that has reached nearly 20%.
“The pound has lost institutional support in recent years… and last night’s changes are a strong indication that the central bank is no longer able to manage Turkey’s monetary policy,” said Arda Tunca, economist at Eko Faktoring.
The combination of monetary policy and financial regulation has left “the Turkish economy extremely fragile”, he added.
Last month, the central bank cut its key rate to 18% as Erdogan – down in opinion polls and keen to boost credit and exports – publicly asked. Most analysts called easing a mistake at a time of accelerating global inflation.
The overhaul of the MPC came after the presidency said on Wednesday evening that Erdogan had met with Central Bank Governor Sahap Kavcioglu and released a photo of the two together.
It marked a turnaround from last week when Reuters reported, citing three sources, that Erdogan was losing faith in Kavcioglu and that the two had communicated little in recent weeks.
Although the MPC has seen a rapid turnover this year, Kavcioglu has been pushing for changes in recent days, according to one of the sources with knowledge of the matter.
“Kavcioglu kind of paved the way for being able to cut rates faster with new members,” the person said.
Erdogan appointed Kavcioglu governor in March.
In just over two years, Erdogan abruptly sacked three bank governors for political differences, a dizzying display of political interference that seriously undermined the bank’s credibility and predictability.
“Sacking central bank officials in the middle of the night without a very good explanation is not the way to boost central bank credibility or boost market confidence,” a foreign investor said Thursday.
Turkey’s headline inflation hit a two-and-a-half-year high of 19.58% in September, while a baseline measure – which Kavcioglu insisted on over the past month – was 16.98%.
Speaking to a parliamentary committee this week, Kavcioglu said September’s rate cut came as no surprise and had little to do with the subsequent sale of the lire.
The bank’s next policy-making meeting will take place on October 21, when another rate cut is considered likely.
Market reaction to Thursday’s changes included an increase in the premium demanded by investors for holding Turkish debt versus US Treasuries, based on the JPMorgan EMBI Global Diversified Index. It hit 521 basis points, the highest since April, leaving spreads larger than those of Ukraine and Kenya.
The second source who spoke to Reuters said Kucuk and Yavas – who missed the September political meeting – objected to some recent banking decisions.
Kucuk also opposed an unorthodox policy in 2019-20 of using the bank’s foreign exchange reserves to support the lira via sales from state-owned banks, the person said, adding that Kucuk had warned the MPC that failure to keep rates high enough now only leads to even higher rates. in the future.
Cakmak, the new deputy governor, was vice-chairman of Turkish banking supervisory body BDDK from 2019. Previously, he held positions at state lender Ziraat Bank, including director of human resources.
Tuna, the MPC’s other hiring, was a professor and was also a member of the BDDK board from 2003 to 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 Praefcke, analyst at Commerzbank. “This does not bode well for the Turkish lira.”