Turkish President Tayyip Erdogan fired three central bank lawmakers on Thursday, two of whom opposed the latest interest rate cut, clearing the way for further policy easing and sending the lira to a new record low. .
Analysts saw the move, announced at midnight in the Official Gazette, as new evidence of political interference by Erdogan, a self-described enemy of interest rates who frequently calls for monetary stimulus.
With no explanation for the decision, Erdogan fired Lieutenant Governors Semih Tumen and Ugur Namik Kucuk, along with the longest-serving member of the monetary policy committee (MPC), Abdullah Yavas, the gazette said.
He appointed two new members, Taha Cakmak as a deputy and also Yusuf Tuna, who are little known in the central bank or among economists, leaving the MPC with little experience in monetary policy after a years-long review by the president.
Two sources familiar with the internal deliberations said that Kucuk and Yavas were pulled after disagreeing with last month’s 100 basis point rate cut, which at the time surprised investors and caused the currency to fall.
On Thursday, the lira weakened as much as 1 percent to a record low of 9.1900 against the dollar after the announcement before cutting losses.
The currency has lost about 19 percent this year, mainly due to the central bank’s bruised credibility and concerns among investors and savers about premature rate cuts amid inflation that has soared to about 20 percent.
“The lira has lost its institutional support in recent years … and last night’s changes clearly indicate that the central bank is no longer capable of managing Turkey’s monetary policy,” said Arda Tunca, an economist at Eko Faktoring.
The combination of monetary policy and financial regulations has left the “Turkish economy extremely fragile,” he added.
Last month, the central bank cut its monetary policy rate to 18 percent as Erdogan, who was backing down in opinion polls and eager to boost credit and exports, had publicly sought. Most analysts called the easing a mistake at a time of acceleration in global inflation.
The MPC reform came after the presidency said Wednesday night that Erdogan had met with Central Bank Governor Sahap Kavcioglu and posted a photo of the two men together.
That marked a change from last week when Reuters reported, citing three sources, that Erdogan was losing confidence in Kavcioglu and that the two had communicated little in recent weeks.
Although the MPC has seen rapid turnover this year, Kavcioglu pushed for changes in recent days, according to one of the sources with knowledge of the matter.
“Kavcioglu kind of cleared the way to be able to lower rates more quickly with new members,” the person said.
Erdogan appointed Kavcioglu governor in March.
In just over two years, Erdogan has abruptly fired three bank governors over political differences, a dizzying show of political interference that seriously affected the bank’s credibility and predictability.
“Firing central bank officials in the middle of the night without a very good explanation is not how you build central bank credibility or strengthen market confidence,” a foreign investor said Thursday.
Turkey’s headline inflation hit a two-and-a-half-year high of 19.58 percent in September, while a core measure, which Kavcioglu has been highlighting for the past month, was 16.98 percent.
Addressing a parliamentary committee this week, Kavcioglu said the September rate cut was not a surprise and had little to do with the subsequent lira liquidation.
The bank’s next policy-setting meeting is October 21, when another rate cut is expected to be likely.
Market reaction to Thursday’s changes included an increase in the premium demanded by investors to hold Turkish debt over US Treasuries, according to the JPMorgan EMBI Global Diversified Index. It reached 521 basis points, the highest since April, leaving spreads above those of Ukraine and Kenya.
The second source who spoke to Reuters said that both Kucuk and Yavas, who missed the September policy meeting, had opposed some recent banking decisions.
Kucuk also opposed an unorthodox policy in 2019-2020 of using the bank’s foreign exchange reserves to back the lira through sales by state banks, the person said, adding that Kucuk had warned the MPC not to hold High enough rates now only lead to even higher rates. in the future.
Cakmak, the new deputy governor, was vice chairman of Turkey’s BDDK banking watchdog since 2019. Previously, he held positions at state-owned lender Ziraat Bank, including head of human resources.
Tuna, the other MPC employee, was a professor and also served as a member of the BDDK board of directors from 2003 to 2009.
“It can be assumed that the newly appointed members of the central bank committee will support Kavcioglu and Erdogan’s monetary policy,” said Antje Praefcke, an analyst at Commerzbank. “That doesn’t bode well for the Turkish lira.”