Erdogan Sacks Central Bank’s Chief After Hike In Interest Rate

Turkey braced on Saturday for a new spell of financial
turbulence after President Recep Tayyip Erdogan sacked his
market-friendly central bank chief and replaced him with a former
ruling party lawmaker.

A presidential decree published late on Friday gave no
explanation as to why Erdogan was replacing Naci Agbal with Sahap
Kavcioglu in the key post.

But the decision was announced just a day after the central bank
sharply raised the main interest rate to 19 per cent to fight
inflation.

Kavcioglu has written columns for a pro-government newspaper
heavily criticising Agbal’s propensity to raise rates.

Analysts say the new central banker subscribes to Erdogan’s
unorthodox belief that higher interest rates cause inflation.

Most economists believe it slows inflation down by raising the
cost of doing business.

“The shock decision by Turkey’s President Erdogan to sack
central bank governor Naci Agbal late on Friday is likely to
trigger large falls in the lira when markets open on Monday,”
analyst Jason Tuvey of Capital Economics wrote in a research
note.

“It looks like the central bank’s efforts to fight the country’s
inflation problem may come to an end, and a messy balance of
payments crisis has become (once again) a real possibility,” Tuvey
warned.

Inflation struggle
Agbal was appointed during an economic team overhaul that Erdogan
engineered in November to halt a steep Turkish currency slide.

The lira had by then fallen to 8.5 to the dollar from 5.9 at the
start of 2020 as past central bank managers kept interests rates
low while inflation gathered pace.

Economists at Goldman Sachs estimated that the central bank
spent more than $100 million in 2020 alone buying up foreign
currencies in an attempt to support the lira.

But Turks kept stocking up on gold and exchanging liras for
euros and dollars to preserve their saving.

Foreign investors fled the Turkish market and the economy
appeared headed for a major crisis.

Erdogan appeared to concede defeat and embrace orthodoxy by
installing Agbal at the central bank and reformists at the finance
ministry in the November reshuffle.

Agbal’s term has seen the lira stabilise. It stood at around 7.3
against the dollar on Friday.

But the lira began to reverse some of its earlier gains in
February and the annual inflation rate rose to 15.6 per cent due to
external pressure on the Turkish economy.

Agbal’s decision to raise rates by a greater than expected 200
basis points to 19 per cent on Thursday was cheered by investors
but appeared to be the last straw for Erdogan.

Kavcioglu’s Yeni Safak newspaper criticised it on its front page
on Friday.

‘Paid the price’
Erdogan’s dislike of high interest rates has remained a constant in
Turkish politics.

He once called it the “mother and father of all evil” and
stressed again in January that he was “absolutely against” higher
rates.

His new central banker Kavcioglu suggested in a February column
that higher interest rates “indirectly” lead to higher
inflation.

Emerging markets economist Timothy Ash called Agbal “a patriot
who made the difficult but right choices in the best interests of
Turkey at the right times. He has paid the price for that.”

Kavcioglu becomes the fourth central bank chief Erdogan has
appointed since July 2019.

He faces the task of meeting Erdogan’s goal of bringing down the
annual inflation rate down to five per cent by Turkey’s next
scheduled election in 2023.

But Tuvey of Capital Economics said Agbal’s dismissal also
carried political risks for Erdogan because some in the president’s
ruling party were growing uneasy with his unorthodox approach to
economics.

“The sacking of Governor Agbal runs the risk of splitting the
party, which had already seen several major players depart in
recent years,” Tuvey wrote.

AFP

Turkey braced on Saturday for a new spell of financial
turbulence after President Recep Tayyip Erdogan sacked his
market-friendly central bank chief and replaced him with a former
ruling party lawmaker.

A presidential decree published late on Friday gave no
explanation as to why Erdogan was replacing Naci Agbal with Sahap
Kavcioglu in the key post.

But the decision was announced just a day after the central bank
sharply raised the main interest rate to 19 per cent to fight
inflation.

Kavcioglu has written columns for a pro-government newspaper
heavily criticising Agbal’s propensity to raise rates.

Analysts say the new central banker subscribes to Erdogan’s
unorthodox belief that higher interest rates cause inflation.

Most economists believe it slows inflation down by raising the
cost of doing business.

“The shock decision by Turkey’s President Erdogan to sack
central bank governor Naci Agbal late on Friday is likely to
trigger large falls in the lira when markets open on Monday,”
analyst Jason Tuvey of Capital Economics wrote in a research
note.

“It looks like the central bank’s efforts to fight the country’s
inflation problem may come to an end, and a messy balance of
payments crisis has become (once again) a real possibility,” Tuvey
warned.

Inflation struggle
Agbal was appointed during an economic team overhaul that Erdogan
engineered in November to halt a steep Turkish currency slide.

The lira had by then fallen to 8.5 to the dollar from 5.9 at the
start of 2020 as past central bank managers kept interests rates
low while inflation gathered pace.

Economists at Goldman Sachs estimated that the central bank
spent more than $100 million in 2020 alone buying up foreign
currencies in an attempt to support the lira.

But Turks kept stocking up on gold and exchanging liras for
euros and dollars to preserve their saving.

Foreign investors fled the Turkish market and the economy
appeared headed for a major crisis.

Erdogan appeared to concede defeat and embrace orthodoxy by
installing Agbal at the central bank and reformists at the finance
ministry in the November reshuffle.

Agbal’s term has seen the lira stabilise. It stood at around 7.3
against the dollar on Friday.

But the lira began to reverse some of its earlier gains in
February and the annual inflation rate rose to 15.6 per cent due to
external pressure on the Turkish economy.

Agbal’s decision to raise rates by a greater than expected 200
basis points to 19 per cent on Thursday was cheered by investors
but appeared to be the last straw for Erdogan.

Kavcioglu’s Yeni Safak newspaper criticised it on its front page
on Friday.

‘Paid the price’
Erdogan’s dislike of high interest rates has remained a constant in
Turkish politics.

He once called it the “mother and father of all evil” and
stressed again in January that he was “absolutely against” higher
rates.

His new central banker Kavcioglu suggested in a February column
that higher interest rates “indirectly” lead to higher
inflation.

Emerging markets economist Timothy Ash called Agbal “a patriot
who made the difficult but right choices in the best interests of
Turkey at the right times. He has paid the price for that.”

Kavcioglu becomes the fourth central bank chief Erdogan has
appointed since July 2019.

He faces the task of meeting Erdogan’s goal of bringing down the
annual inflation rate down to five per cent by Turkey’s next
scheduled election in 2023.

But Tuvey of Capital Economics said Agbal’s dismissal also
carried political risks for Erdogan because some in the president’s
ruling party were growing uneasy with his unorthodox approach to
economics.

“The sacking of Governor Agbal runs the risk of splitting the
party, which had already seen several major players depart in
recent years,” Tuvey wrote.

AFP