On Thursday, Turkish President Tayyip Erdogan fired three central bank policy makers, two of whom were seen opposing the latest interest rate cut, clearing the way for more political easing and sending the lira to a new all-time low.
Analysts saw the move – announced at midnight in the official newspaper – as new evidence of political interference by Erdogan, a self-described interest rate enemy who often calls for monetary stimulus.
Without any explanation for the decision, Erdogan fired Deputy Governors Semih Tumen and Ugur Namik Kucuk, along with the longest-serving Monetary Policy Committee (MPC), Abdullah Yavas, the newspaper said.
He appointed two new members – Taha Cakmak as 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 year-long review of the president.
Two sources familiar with internal deliberations said Kucuk and Yavas were removed after disagreeing with last month’s 100-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 mating losses.
The currency has lost about 19 percent this year, mainly due to the central bank’s damaged credibility and concerns among investors and savers about premature interest rate cuts in the face of inflation, which has risen to close to 20 percent.
“The lira has lost its institutional support in recent years … and yesterday’s changes strongly suggest that the central bank can no longer handle Turkey’s monetary policy,” said Arda Tunca, an economist at Eko Faktoring.
The combination of monetary policy and financial regulations has made the “Turkish economy extremely fragile,” he added.
Last month, the central bank lowered its key interest rate to 18 percent, as Erdogan – who slipped in opinion polls and was keen to increase credit and exports – had applied publicly. Most analysts called the easing a mistake in accelerating global inflation.
The MPC review came after the presidency on Wednesday night said that Erdogan had met with central bank governor Sahap Kavcioglu and that it published a photo of the two men together.
It marked a turnaround from last week when Reuters reported, citing three sources, that Erdogan had lost confidence in Kavcioglu and that the two had communicated a bit in recent weeks.
Although MPC has seen rapid turnover this year, Kavcioglu has been pushing for change in recent days, according to one of the sources with knowledge of the issue.
“Kavcioglu cleared the way to be able to lower prices faster with the new members,” the person said.
Erdogan appointed Kavcioglu governor in March.
In just over two years, Erdogan has suddenly fired three bank executives over political differences, a dizzying display of political interference that severely affected the bank’s credibility and predictability.
“Dismissing central bank officials in the middle of the night without a very good explanation is not how you build the central bank’s credibility or strengthen market confidence,” a foreign investor said on Thursday.
Turkey’s main inflation peaked at 19.58 percent in two and a half years in September, while a core measure – as Kavcioglu has emphasized in the past month – was 16.98 percent.
Kavcioglu spoke to a parliamentary committee this week, saying that the interest rate cut in September was not a surprise and that it did not have much to do with the subsequent lira sale.
The bank’s next policy meeting is on October 21, when another interest rate cut is seen as likely.
The market’s reaction to Thursday’s changes included an increase in the premium required by investors to hold Turkish debt over the safe-haven United States Treasuries, based on the JPMorgan EMBI Global Diversified Index. It reached 521 basis points, the highest since April, and spread across Ukraine and Kenya.
The other source who spoke to Reuters said that both Kucuk and Yavas – who missed September’s political meeting – had opposed some recent banking decisions.
Kucuk also opposed an unorthodox 2019-2020 policy of using the bank’s foreign exchange reserves to support the lira through government bank sales, the person said, adding that Kucuk had warned the MPC that failing to keep interest rates high now would only lead to even higher interest rates in the future.
Cakmak, the new deputy governor, was vice chairman of Turkey’s BDDK bank watchdog from 2019. He previously held positions at state lender Ziraat Bank, including human resources manager.
Tuna, the other MPC landlord, was a professor and also worked as a manager in BDDK 2003-2009.
“It can be assumed that the newly appointed members of the Central Bank Committee will support Kavcioglus and Erdogan’s monetary policy,” said Antje Praefcke, an analyst at Commerzbank. “It is not a good sign for the Turkish lira.”