When Turkey raised interest rates more than market expectations last week, Naci Agbal was cheered by investors who saw the move as further proof that the central bank governor was willing and able to continue. a conventional monetary policy.
Two days later he was unemployed – the third governor, President Recep Tayyip Erdogan, was sacked in less than two years.
The shock move announced in the early hours of Saturday rocked investors who were hoping that the appointment of Agbal, a pro-market economist, meant four months ago that Erdogan was ready to cede some autonomy to the bank.
Now analysts are warning of the risk of another currency crisis at a precarious time for emerging markets, and fear that Erdogan, who has long criticized high interest rates as “the mother of all evils” , goes back to its old ways.
“Investors engaged in consensual hallucinations, believing that Erdogan would back down; it would be different this time, it wouldn’t trigger a currency crisis, ”said Edward Al-Hussainy, head of emerging market debt research at Columbia Threadneedle Investment. “This decision breaks this cycle of expectations. As long as Erdogan is in the background, no one will believe that a solution is lasting. “
He added that the sacking “really makes Turkish assets untouchable for a while”.
Sahap Kavcioglu, who replaced Agbal, said in a statement on Sunday that monetary policy instruments “will continue to be used effectively towards the fundamental goal of permanently lowering inflation.” He said the monetary policy committee would meet as scheduled on April 15, suggesting there would be no special MPC meetings.
But Kavcioglu, a little-known banking professor, shares the president’s unconventional view that high interest rates cause inflation.
Erdogan has long argued that borrowing costs should be kept low to help boost the $ 730 billion economy. As a result, he lobbied a succession of central bank governors to keep rates under control even as volatile currency depreciated and central bank foreign reserves collapsed.
The bank is estimated to have spent $ 100 billion on interventions to slow the lira’s decline from 2018 – the last time Erdogan’s policies sparked a currency panic.
But as the lira lost as much as 30% of its value against the dollar last year, fueling double-digit inflation, the president seemed to accept the need for change.
He appointed Agbal, a respected former finance minister, to the central bank in November, shortly after the resignation of Berat Albayrak, Erdogan’s son-in-law and finance minister, who has been widely criticized for his economic management.
In the months that followed, the central bank raised the benchmark interest rate by a cumulative 875 basis points to 19 percent – in Agbal’s last act on Thursday, it was increased by 200 bps. The lira has strengthened about 18 percent against the dollar, although inflation is still around 16 percent.
Refet Gurkaynak, professor of economics at Bilkent University, said the reestablishment of reading since Agbal’s appointment could have spurred Erdogan to act.
“A little sane central banking has calmed the markets so that now you can do things you wouldn’t dare to do when your currency falls off a cliff,” Gurkaynak said. “All they wanted was not to fall into the abyss, but they are happy to see the country hanging over the precipice.
In the columns of Yeni Safak newspaper, Kavcioglu, a former lawmaker with Erdogan’s ruling Justice and Development party, previously called for loose monetary policy and adopted the use of central bank reserves to support the lira.
A day after Agbal’s sacking, Yeni Safak hinted at what might happen as his front page accused Agbal of “turning a deaf ear” to the Turks’ economic woes to serve as an “interest rate lobby”.
But Dennis Shen, of Scope Ratings, said Turkey couldn’t emulate the low-interest policies other governments are using to offset the impact of the coronavirus pandemic “when the lira itself faces it. to a crisis of confidence ”.
“There remains a misunderstanding among Turkish leaders about the limited monetary policy space the government has to prematurely release rates with rising inflation,” Shen said.
Wolfango Piccoli, co-chairman of consultancy Teneo Intelligence, said it could be difficult for Kavcioglu to start cutting rates at a time when US Treasury yields are rising and Turkey is due to renew over 180 this year. billion dollars of debt denominated in foreign currencies.
“The options menu is very short if the situation escalates quickly. The only [measure] in the short term, there is still capital control, although I did not expect it because it is politically very toxic, ”he said.
Any movement in the foreign currency accounts of Turkish citizens, which represent more than half of bank deposits, risks triggering public outrage. Turks changed their savings to dollars, euros and gold to hedge against inflation, lira volatility, and low deposit rates.
Still, Al-Hussainy believes such controls may be needed to slow capital flight.
“Financial crises are crises of belief, and the odds have increased this weekend that we are going by this speed,” he said.
According to his LinkedIn page, Kavcioglu was vice chairman of Halkbank for a decade that included a period when the state lender was accused of helping Iran avoid US sanctions.
Bulent Gultekin, a former Turkish central bank governor who teaches at the Wharton School at the University of Pennsylvania, said Agbal’s sacking was the latest example of Erdogan’s bossy style.
“With one individual taking all the power, the institutions mean nothing. The moment you see the problem at the central bank, it’s just a symptom of a much deeper problem, ”he said.
In a farewell message to his colleagues, Agbal defended his record.
“We have undertaken important and courageous work to ensure lasting price stability,” HaberTurk reported. “I hope that one day our country will achieve financial and economic stability.”