Erdogan ousts Central-Bank head, installs interest-rate ally
Two days after a bigger-than-expected increase in interest rates, Turkey’s President Recep Tayyip Erdogan removed the country’s third central-bank governor in less than two years, and replaced him with an advocate of lower rates.
Erdogan fired Governor Naci Agbal, who was appointed in November, and gave the job to Sahap Kavcioglu, according to a decree published after midnight on Saturday in the Official Gazette. Agbal’s abrupt removal comes on the heels of a 200 basis-point interest-rate hike by the central bank on Thursday, double what was expected in a Bloomberg survey.
Agbal took the job as Turkey’s top banker after weeks of declines in the lira and raised the benchmark one-week repo rate by a cumulative 875 basis points since, boosting the central bank’s damaged credibility among investors. Erdogan, who backs an unconventional theory that high rates cause inflation, has for years frequently chastised the central bank when he thought it was setting borrowing costs too high.
“We worked courageously for price stability,” Agbal said, according to HaberturkTV. “I hope permanent price-stability target can be achieved one day.”
Kavcioglu is a professor of banking at Marmara University in Istanbul and a columnist at the pro-government Yeni Safak newspaper. The paper criticized the monetary authority’s latest interest-rate increase on its front page on Friday, saying the decision “turned a deaf ear” to Turkey’s 83 million people, would hurt economic growth and primarily benefits “London-based owners of hot money.”
In a column published by Yeni Safak on February 9, Kavcioglu said it was “saddening” to see columnists, bankers and business organizations in Turkey seeking economic stability in high interest rates at a time when other countries had negative rates.
“The central bank shouldn’t insist on high interest rates,” he wrote. “When interest rates in the world are close to zero, raising interest rates here won’t solve our economic problems. To the contrary, it’ll deepen them in the period ahead.”
He also seconded Erdogan’s unorthodox theory on the relationship between interest rates and inflation, saying that raising interest rates would “indirectly open the way to increasing inflation.” Most central bankers and economists around the world believe the opposite to be true, and would argue for raising interest rates to try and control excessive inflation.
“The key question is how quickly Governor Kavcioglu will try to reverse cumulative 875 basis-points hikes his predecessor delivered since November” said Piotr Matys, an emerging-market strategist at Rabobank. “It is reasonable to assume that he may reverse the most recent 200 basis-points hike as soon as the next meeting of the central bank. Such a decision would not be approved by the market due to prevailing inflationary risks.”
Kavcioglu takes over after the pace of inflation accelerated for a fifth month in February to nearly 16%. The currency has taken one of the worst hits among peers from climbing US Treasury yields, slumping more than 7% since mid-February and adding to calls for Agbal to backstop the market with higher rates.
Despite the recent decline, the lira strengthened around 18% under Agbal’s brief tenure, as expectations grew that he’d return to more orthodox monetary policies and resist political pressure for lower borrowing costs.
The government’s growth push in 2020 saw the currency weaken by 20% against the dollar, keeping consumer inflation in double digits for the entire year. But the economy eked out an expansion of 1.8% despite the impact of the coronavirus pandemic and associated lockdowns, and grew 5.9% in the fourth quarter, faster than all other Group of 20 nations except China.
Turkey should abandon tight monetary policy and focus on supporting investment, exports and employment that contribute to growth, Kavcigolu said in a recent column. “We’ve got to give up on interest-rate increases and bring borrowing costs, which directly impact investment and production costs, to reasonable levels,” he wrote in Yeni Safak on March 9.
Kavcioglu, who’s also a former lawmaker for the ruling AK Party, defended reserve policies executed from 2018 to 2020, when Turkey began spending its foreign-currency reserves to try and prop up the lira in times of volatility. It also borrowed tens of billions of dollars through swap agreements with commercial lenders.
Turkey’s total gross reserves, including gold and reserves held by the central bank on behalf of commercial lenders, dropped 20% last year until Agbal’s appointment to $85.2 billion, while net foreign-exchange reserves fell by more than half to $19.6 billion.
The use of the central bank’s foreign-exchange coffers at the time helped to rein in inflation, interest rates and the exchange rate, Kavcigolu said. Goldman Sachs Group Inc. economists estimate the interventions exceeded $100 billion last year alone.
“Given that Turkey’s FX reserves have been already depleted and cannot be used to support the lira, it would be prudent to assume that a set of measures that may not be market friendly could be announced to offset possible interest rate cuts,” Matys said.