Erdogan becomes head of the central bank as a low interest rate lawyer

Photographer: Mustafa Ciftci / Anadolu Agency / Getty Images

Two days after a larger than expected rise in interest rates, Turkish President Recep Tayyip Erdogan deposed the third central bank governor in less than two years and replaced him with a proponent of lower interest rates.

Erdogan fired Governor Naci Agbal, who was appointed in November, and gave the job to Sahap Kavcioglu, according to a decree published in the official gazette after midnight on Saturday. Agbal’s abrupt removal follows a 200 basis point rate hike by the central bank on Thursday, double what was expected in a Bloomberg survey.

Agbal took the job as Turkey’s top banker after weeks of declines in the lira and has since raised the one-week reference rate by 875 basis points, adding credibility to the central bank among investors. Erdogan, who supports an unconventional theory that high interest rates cause inflation, has repeatedly reprimanded the central bank for years when he thought the financing costs were too high.

Kavcioglu is a banking professor at Marmara University in Istanbul and a columnist for the pro-government newspaper Yeni Safak. The newspaper criticized the monetary authority’s latest interest rate hike on Friday’s front page, saying the decision ‘went deaf’ to Turkey’s 83 million people, hurt economic growth and especially the ‘London-based owners of hot money’. good would come.

Turkish pro-government newspaper paralyzes central bank rate hike

Interest rates

In a column published by Yeni Safak on Feb. 9, Kavcioglu said it was “sad” to see columnists, bankers and business organizations in Turkey seeking economic stability with high interest rates at a time when other countries had negative interest rates. had.

“The central bank should not push for high interest rates,” he wrote. “If interest rates in the world are close to zero, raising interest rates here will not solve our economic problems. On the contrary, it will deepen them in the foreseeable future. “

He also supported Erdogan’s unorthodox theory of the relationship between interest rates and inflation, saying that raising interest rates would “indirectly open the way to rising inflation.” Most central bankers and economists around the world believe the opposite is true and would argue in favor of raising interest rates to try to control excessive inflation.

Growth push

Kavcioglu takes over after the inflation rate accelerated to nearly 16% for a fifth month in February. The currency has taken one of the worst blows from peers from the hike in US Treasury yields, which have fallen more than 7% since mid-February, and calls for Agbal to push the market back with higher interest rates.

Despite its recent decline, under Agbal’s short tenure, the lira has risen by about 18% as expectations grew that it would return to a more orthodox monetary policy and withstand political pressure to cut funding costs.

The government’s growth in 2020 weakened the currency by 20% against the dollar, keeping consumer inflation at double digits throughout the year. But the economy expanded 1.8% despite the impact of the coronavirus pandemic and associated lockdowns, and grew 5.9% in the fourth quarter, faster than any other Group of 20 countries except China.

Turkey should abandon tight monetary policy and focus on supporting investment, exports and jobs that contribute to growth, Kavcigolu said in a recent column. “We need to give up interest rate hikes and bring financing costs, which directly affect investment and production costs, to a reasonable level,” he wrote in Yeni Safak on March 9.

Reservation Policy

Kavcioglu, who is also a former lawmaker for the ruling Ak party, defended the reserve policy pursued from 2018 to 2020, when Turkey began to spend its foreign exchange reserves to try to keep the lira up in times of volatility. It also borrowed tens of billions of dollars through barter deals with commercial lenders.

Turkey’s total gross reserves, including gold and reserves held by the central bank on behalf of commercial lenders, fell 20% last year until Agbal’s appointment to $ 85.2 billion, while net foreign exchange reserves fell more than half to $ 19.6 billion.

Using the central bank’s foreign exchange at the time helped keep inflation, interest rates and the exchange rate in check, Kavcigolu said. Economists from Goldman Sachs Group Inc. estimate that interventions exceeded $ 100 billion last year alone.

Updates with economic background, markets from the eighth paragraph