Economy

Turkey's Erdogan Fires Central Bank Deputy Governor in the Fourth Ousting Since March

Murat Cetinmuhurdar | Reuters
  • The move constitutes the departure of the fourth central bank policymaker in the last two months.
  • Turkey's annual inflation clocked in at above 16% in April, the highest since mid-2019.
  • Turkey is facing spiking coronavirus cases and a recent lockdown that threatens to derail its economically crucial summer tourist season once again.

Turkish President Recep Tayyip Erdogan has replaced a deputy governor of Turkey's central bank, the latest in a series of oustings that have unsettled investors.

This time, however, the move is less worrying than previous high-profile firings — the position was given to Semih Tumen, a broadly respected economics department chief at TED University in Ankara who had already worked for the central bank from 2002 to 2018. The firing removed Oguzhan Ozbas, who had been a member of the monetary policy committee.

The move constitutes the departure of the fourth central bank policymaker in the last two months.

Announced in an official decree overnight, the reshuffle had little effect on markets. The dollar was up 0.6% on the lira, which was trading at $8.4292 on Tuesday afternoon in Istanbul.

That's a significant difference from the market reaction to Erdogan's central bank intervention in March, when he sacked former central bank chief Naci Agbal after less than five months in the job. 

Exchange offices in Istanbul, Turkey seen on October 28, 2020. Due to the increase in exchange rates and the economic instability, people change currency and buy Turkish lira.
Erhan Demirtas | NurPhoto via Getty Images
Exchange offices in Istanbul, Turkey seen on October 28, 2020. Due to the increase in exchange rates and the economic instability, people change currency and buy Turkish lira.

Agbal's policies raised interest rates — something Erdogan vocally opposes, despite double-digit inflation in Turkey. And for investors, who saw Agbal as a stabilizing market force, the move was highly unnerving.

The struggling Turkish lira had dropped more than 16% in early morning trading following the news, hitting 8.4 against the dollar compared to a close of 7.21 the previous day. While it temporarily pared some losses, the currency is right back around that 8.4 level, one of its lowest ever against the greenback.

The latest development was yet another blow for a country facing spiking coronavirus cases and a new lockdown that threatens to derail its economically crucial summer tourist season once again.

Investors unsettled

Agbal was the third central bank chief to be fired in two years, sending shockwaves through the investor community. This time, the impact is negligible, says Nick Stadtmiller, director of emerging markets strategy at ‎Medley Global Advisors in New York.

"It's hard to imagine much of a market reaction off a change in deputy governor," he told CNBC on Tuesday.

"Investors have grown accustomed to headlines of central bank governors fired in the night, and everyone has already made up their minds on how independent the central bank is in Turkey."

Erdogan's moves are particularly unsettling for investors because they demonstrate that Turkey's central bank and monetary policymaking aren't independent, and are at the mercy of the president's political impulses, many analysts say.

Erdogan, meanwhile, wants to keep borrowing rates low in order to stimulate the economy, and he believes that raising rates will increase inflation, rather than lower it — the opposite of what most economists believe to be true.

Erdogan has said he expects both inflation and interest rates to be below 10% this year. Turkey's annual inflation clocked in at above 16% in April, the highest since mid-2019. Goldman Sachs expects it to peak at 18%. The country's key interest rate remains high at 19%.

In terms of the future of monetary policy, all eyes will be on Sahap Kavcioglu, the current central bank chief who replaced Agbal in March. Kavcioglu, a former newspaper columnist, was known to share Erdogan's views on interest rates, but has not yet lowered them, citing the high inflation level.

The next rate-setting meeting for the central bank will be on June 17.

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