Turkish President Tayyip Erdogan dismissed three central bank policymakers on Thursday, two of whom were seen to oppose the last interest rate cut, clearing the way for more policy easing and sending the lira to a new all-time low.
Analysts viewed the move – announced at midnight in the Official Gazette – as fresh evidence of political interference by Erdogan, a self-described enemy of interest rates who frequently calls for monetary stimulus.
With no explanation for the decision, Erdogan fired deputy governors Semih Tumen and Ugur Namik Kucuk, along with the longest-serving monetary policy committee (MPC) member, Abdullah Yavas, the gazette said.
He appointed two new members – Taha Cakmak as a deputy and also Yusuf Tuna – who are little known at the central bank or among economists, leaving the MPC with little monetary policy experience after a years-long overhaul by the president.
Two sources familiar with internal deliberations said Kucuk and Yavas were removed after disagreeing with last month’s 100 basis-point rate cut, which at the time surprised investors and sent the currency tumbling.
On Thursday, the lira weakened as much as 1 percent to a record low of 9.1900 against the dollar after the announcement before paring losses.
The currency has shed some 19 percent this year, primarily due to the central bank’s bruised credibility and worries among investors and savers over premature rate cuts in the face of inflation that has risen to near 20 percent.
“The lira has lost its institutional support in recent years … and last night’s changes strongly indicate that the central bank is no longer capable of managing Turkey’s monetary policy,” said Arda Tunca, economist at Eko Faktoring.
The combination of monetary policy and financial regulations have left the “Turkish economy extremely fragile,” he added.
Last month, the central bank cut its policy rate to 18 percent as Erdogan – sliding in opinion polls and eager to boost credit and exports – had publicly sought. Most analysts called the easing a mistake at a time of accelerating global inflation.
The MPC overhaul came after the presidency said on Wednesday evening that Erdogan had met Central Bank Governor Sahap Kavcioglu and it published a photo of the two men together.
That marked a turnaround from last week when Reuters reported, citing three sources, that Erdogan was losing confidence in Kavcioglu and that the two had communicated little in recent weeks.
Though the MPC has seen a rapid turnover this year, Kavcioglu pushed for changes in recent days, according to one of the sources with knowledge of the matter.
“Kavcioglu sort of cleared the path to be able to cut rates more quickly with the new members,” the person said.
Erdogan named Kavcioglu governor in March.
In slightly more than two years, Erdogan has abruptly fired three bank governors over policy differences, a dizzying display of political interference that badly hit the bank’s credibility and predictability.
“Firing central bank officials in the middle of the night without a very good explanation is not how you build central bank credibility or bolster market confidence,” one foreign investor said on Thursday.
Turkey’s headline inflation hit a two-and-a-half-year high of 19.58 percent in September, while a core measure – which Kavcioglu has been stressing over the last month – was 16.98 percent.
Addressing a parliamentary committee this week, Kavcioglu said September’s rate cut was not a surprise and had little to do with the subsequent lira sell-off.
The bank’s next policy-setting meeting is on October 21, when another rate cut is seen as likely.
Market reaction to Thursday’s changes included a jump in the premium demanded by investors to hold Turkish debt over safe-haven United States Treasuries, based on the JPMorgan EMBI Global Diversified index. It hit 521 basis points, the highest since April, leaving spreads above those of Ukraine and Kenya.
The second source who spoke to Reuters said both Kucuk and Yavas – who missed September’s policy meeting – had opposed some recent bank decisions.
Kucuk also opposed an unorthodox policy in 2019-2020 of using the bank’s forex reserves to support the lira via state bank sales, the person said, adding that Kucuk had warned the MPC that failing to keep rates high enough now only leads to even higher rates in the future.
Cakmak, the new deputy governor, was a deputy chairman at Turkey’s BDDK banking watchdog from 2019. Previously, he held posts at state lender Ziraat Bank, including head of human resources.
Tuna, the other MPC hire, was a professor and also served as a management board member at the BDDK from 2003-2009.
“It can be assumed that the newly appointed members of the central bank committee will support Kavcioglu’s and Erdogan’s monetary policy,” said Antje Praefcke, analyst at Commerzbank. “That is not a good omen for the Turkish lira.”