Erdogan is the central bank’s advocate for low interest rates

Photographer: Mustafa Ciftci / Anadolu Agency / Getty Images

Two days after a larger-than-expected rise in interest rates, Turkish President Recep Tayyip Erdogan ousted the country’s third central bank governor in less than two years and replaced him with a advocate for lower rates.

Erdogan fired Governor Naci Agbal, who was appointed in November, and gave the job to Sahap Kavcioglu, according to a decree published Saturday after midnight in the Official Gazette. Agbal’s sharp pullback comes amid a 200 basis point rise in the central bank’s interest rate on Thursday, double what was expected in a Bloomberg poll.

Agbal took the place as Turkey’s top banker after weeks of falls in the lira and raised the one-week benchmark replacement rate by 875 accumulated basis points, increasing the central bank’s damaged credibility among investors. Erdogan, who supports an unconventional theory that high rates cause inflation, has often punished the central bank for years when it believed it was setting too high borrowing costs.

Kavcioglu is a professor of banking at Marmara University in Istanbul and a columnist for the pro-government newspaper Yeni Safak. The newspaper criticized on Friday the latest rise in monetary authority interest rates on its cover on Friday, saying the decision “deafened” Turkey’s 83 million people, would hurt economic growth and mainly benefit “London-based hot money owners”.

Turkish pro-government newspaper blows up central bank rate hike

Interest rates

In a column published by Yeni Safak on February 9, Kavcioglu said it was “sad” to see columnists, bankers and business organizations in Turkey seek economic stability at high interest rates at a time when other countries had negative rates.

“The central bank should not insist on high interest rates,” he wrote. “When interest rates in the world are close to zero, raising interest rates here will not solve our economic problems. On the contrary, it will deepen them in the next period.”

He also seconded Erdogan’s unorthodox theory of the relationship between interest rates and inflation, saying rising interest rates “would indirectly pave the way for rising inflation.” Most central bankers and economists around the world believe the opposite is true and would argue for raising interest rates to try to control excessive inflation.

Growth drive

Kavcioglu takes over after the rate of inflation accelerated for the fifth month in February to almost 16%. The currency has had one of the worst hits among peers in rising U.S. Treasury yields, falling more than 7% since mid-February and adding to Agbal’s requests to support the market with higher rates.

Despite the recent decline, the lira strengthened by around 18% under Agbal’s brief tenure, as expectations grew that it would return to more orthodox monetary policies and resist political pressure to reduce borrowing costs.

The government’s growth momentum in 2020 saw the currency weaken 20% against the dollar, keeping consumer inflation in double digits year-round. But the economy grew by 1.8%, despite the impact of the coronavirus pandemic and associated blockages, and grew 5.9% in the fourth quarter, faster than other groups. of 20 countries except China.

Turkey should abandon strict monetary policy and focus on supporting investment, exports and employment that contribute to growth, Kavcigolu said in a recent column. “We need to give up interest rate hikes and bring the costs of debt, which directly affect investment and production costs, to reasonable levels,” he wrote to Yeni Safak on March 9th.

Reservation policy

Kavcioglu, who was also a legislator for the ruling Ak Party, defended the reserve reserve policies implemented from 2018 to 2020, when Turkey began spending its reserves in foreign currency to try to shore up the lira in times of volatility. He 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, fell 20% last year until Agbal’s appointment to $ 85.2 billion, while reserves net foreign exchange fell more than half to $ 19.6 billion.

The use of central bank currency boxes at the time helped curb inflation, interest rates and the exchange rate, Kavcigolu said. Goldman Sachs Group Inc. economists they estimate that the interventions exceeded $ 100 billion last year alone.

(Updates with economic background, markets from the eighth paragraph)