The Turkish lira hit a record low overnight after President Recep Tayyip Erdogan ordered a new round of dismissals at the country’s central bank.
In a late-night decree published hours after he met Sahap Kavcioglu, the bank’s governor, Erdogan removed two deputy governors.
One of them, Ugur Namik Kucuk, was the only member of the bank’s seven-member monetary policy committee to oppose a rate cut that shocked international investors last month, according to two people familiar with the matter.
“He was the one who voted against the interest rate cut decision so it’s a pity for him and for the country,” said one Istanbul-based banker.
Kucuk was also opposed to the contentious policy of selling off the bank’s foreign currency reserves in a doomed bid to prop up the lira, the banker added. The policy began in early 2019 and continued until the end of last year.
The second sacked deputy governor, Semih Tumen, had been rumoured to be in line to succeed Kavcioglu.
Erdogan, who has ruled Turkey for almost two decades, has gained unprecedented control over the nominally independent central bank in recent years after taking steps to consolidate his own powers.
The president, an opponent of high interest rates, has clashed with a succession of governors as he has sought to prioritise high growth at all costs — including soaring inflation. He has sacked the central bank chief three times since mid-2019, as well as dismissing a number of other officials.
Abdullah Yavas, a longstanding member of the monetary policy committee who had faced criticism in Turkish media for living in the US, was also dismissed by Erdogan on Wednesday night.
In overnight trading the lira, already under pressure owing to a strong US dollar and investor concerns about Turkey’s economic and foreign policy, fell 1 per cent to TL9.19 to the dollar. The currency has suffered a bruising few years, losing 59 per cent of its value against the dollar since the start of 2018.
In early European trading on Thursday, the lira stood at TL9.14 against the dollar.
The lira came under pressure last week after Reuters reported that Erdogan had lost faith in Kavcioglu, who was appointed as head of the central bank in March, even though he slashed the bank’s benchmark rate last month to 18 per cent at time when annual inflation was running at 19 per cent.
The president’s communications chief rebuffed that claim and the Wednesday meeting between Erdogan and Kavcioglu, which was announced by the president’s office, was interpreted by investors as a show of support for the governor.
Kucuk was a well-known figure in the international financial community. A former chief economist at the private Garanti bank, he often took the lead in answering questions during the central bank’s regular video conferences with foreign investors. Market participants were struck by his absence from a meeting that took place last week.
Taha Cakmak, a former official at the state-owned Ziraat Bank and the Turkish banking regulator, was appointed as a new deputy governor. Yusuf Tuna, an academic at Istanbul Commerce University, was appointed to the monetary policy committee.
Hakan Kara, who served as chief economist at the central bank until he was sacked in 2019, said there was “no trace of institutional memory” left on the monetary policy committee after the firings. But he added that it was “no longer needed anyway” because decisions on interest rates were no longer being taken by the bank itself.
Piotr Matys, a senior FX analyst at In Touch Capital Markets, said the reshuffle “strengthens the position of governor Kavcioglu”. He predicted that further rate cuts would come, fuelling further lira losses and stoking inflation.
“If the lira was significantly overvalued, cutting interest rates would be a justified strategy,” he said. “However, this is not the case. At a time when global commodity prices are high and may rise further, Turkey needs a stable or even a stronger currency.”
Many foreign investors have already pulled their money out of Turkey in response to what they see as unconventional and unpredictable policymaking. Foreign investors held just $6bn in government bonds at the end of the second quarter of 2021, according to central bank data, compared with $61.5bn at the same time in 2013.
That means the impact of the falling currency will be felt mostly domestically in the form of higher energy costs in a country that imports almost all of its oil and gas. That in turn risks stoking inflation, which has become a political headache for president Erdogan given deep public discontent over the rising cost of food and other basic goods.
Source: Economy - ft.com
