In Potentially Disastrous Move, Erdogan Fires Another Central Bank Governor

On Thursday, CBT Governor Naci Agbal delighted markets with another rate hike.

The 200bps move was twice market expectations and the statement was hawkish indeed. “The tight monetary policy stance will be maintained decisively for an extended period until strong indicators point to a permanent fall in inflation and price stability,” CBT pledged, in the statement.

Turkey, it appeared, was committed to stable, predictable monetary policy. (Try not to laugh.)

Read more: Erdogan Allows Another Rate Hike At Critical Juncture For Turkey

Agbal, you’re reminded, replaced Murat Uysal in November during a shakeup aimed at restoring market confidence amid a steep slide in the lira.

Uysal, who took over for Murat Cetinkaya in July of 2019 after Cetinkaya failed to slash rates fast enough to appease Recep Tayyip Erdogan, delivered a total of 1,575bps worth of easing during his first 14 months on the job. That pleased Erdogan, but in November, the situation had become untenable. With the lira mired in its longest weekly losing streak since 1999, something had to change.

Thursday’s rate hike brought the total tightening under Agbal to 875bps. That’s a lot of tightening in five months, especially when you serve at the behest of an autocrat whose disdain for higher rates is the stuff of legend.

For Erdogan (who’s fond of describing interest rates as “the mother and father of all evil”) the solution to higher inflation is lower rates. That would be perilous enough in an advanced economy. For Turkey, the unorthodox approach is poison.

But Erdogan isn’t easily dissuaded. From anything. Which is why I perpetually lampoon emerging market analysts and strategists for their misplaced faith in the patently absurd notion that he will ever change his mind about monetary policy or otherwise countenance rate hikes any longer than is necessary to bring the lira back from the brink. On Thursday, following Agbal’s latest hike, I reiterated the point:

I’m a perpetual skeptic when it comes to Erdogan’s patience for higher rates. I find it difficult to believe he’ll countenance much more in the way of hikes.

Fast forward less than 48 hours and Erdogan fired Agbal, naming Sahap Kavcioglu as replacement governor. Kavcioglu is a columnist for the conservative pro-government Yeni Safak, which on Friday used a front-page article to attack Agbal and accuse him of “an operation” against the Turkish economy.

Does that sound familiar? It should. For one thing, Erdogan perpetually frames rate hikes as a kind of domestic conspiracy and the market conditions which force them as an international conspiracy. Second, Stephen Moore’s ill-fated bid for a seat on the Fed board reportedly originated when Donald Trump read Moore’s Op-Eds criticizing rate hikes and accusing Jerome Powell of undermining the US economy.

Kavcioglu offered a few policy recommendations for CBT last month. “All segments of the society now have to abandon conventional policies and agree on more structural solutions,” he wrote, adding that,

The important economics writers, bankers, and business organization representatives of this country mention the existence of problems such as budget deficit, high foreign debt, inflation, current account deficit, insufficient foreign exchange and gold reserves.

They wrote that it would be difficult for money to come to our country as hot money or direct investment before these problems are solved. They even claimed that even if the interest rate was increased before these problems were solved, the exchange rate would not decrease.

First of all, the above problems are the problems that most countries have and are facing in today’s world. But in these countries there is no high interest rate, even negative interest. In addition, there is no problem in capital flowing to these countries.

Therefore, the Central Bank should not insist on the high interest rate policy. While interest rates in the world are close to zero, an increase in interest rates will not solve the economic problems in our country. On the contrary, it will deepen the problems in the future. Because, interest rate increases will indirectly lead to an increase in inflation.

Obviously, the comparison with developed markets is apples to oranges. It’s absurd. When it comes to Turkey’s peers, note that Agbal’s Thursday hike left the country with the highest real rates among major emerging markets.

That is, of course, a good thing. But according to Kavcioglu, it’s bad. Because hot money flows are destabilizing and hikes “indirectly” create inflation.

In short, it sounds as though Kavcioglu in on the same page with Erdogan and now, Kavcioglu is CBT governor.

At the risk of overstating the case, this is a veritable disaster for the lira and for CBT’s credibility. Expect the market to respond accordingly.