What’s next for Turkey?
Two days after a bigger-than-expected increase in interest rates, Turkey’s President Recep Tayyip Erdoğan removed the country’s third central bank governor in less than two years, and replaced him with an advocate of lower rates.
Erdogan fired Governor Naci Ağbal, who was appointed in November, and gave the job to Şahap Kavcıoğlu, according to a decree published after midnight on Saturday in the Official Gazette. Ağbal’s abrupt removal comes on the heels of a 200 basis-point interest-rate hike by the central bank on Thursday, double what was expected in a Bloomberg survey.
Ağbal took the job as Turkey’s top banker after weeks of declines in the lira and raised the benchmark one-week repo rate by a cumulative 875 basis points since, boosting the central bank’s damaged credibility among investors. Erdoğan, who backs an unconventional theory that high rates cause inflation, has for years frequently chastised the central bank when he thought it was setting borrowing costs too high.
Kavcıoğlu is a professor of banking at Marmara University in Istanbul and a columnist at the pro-government Yeni Şafak newspaper. The paper criticized the monetary authority’s latest interest-rate increase on its front page on Friday, saying the decision “turned a deaf ear” to Turkey’s 83 million people, would hurt economic growth and primarily benefits “London-based owners of hot money.”
Interest Rates
In a column published by Yeni Şafak on Feb. 9, Kavcıoğlu said it was “saddening” to see columnists, bankers and business organizations in Turkey seeking economic stability in high interest rates at a time when other countries had negative rates.
“The central bank shouldn’t insist on high interest rates,” he wrote. “When interest rates in the world are close to zero, raising interest rates here won’t solve our economic problems. To the contrary, it’ll deepen them in the period ahead.”
He also seconded Erdoğan’s unorthodox theory on the relationship between interest rates and inflation, saying that raising interest rates would “indirectly open the way to increasing inflation.” Most central bankers and economists around the world believe the opposite to be true, and would argue for raising interest rates to try and control excessive inflation.
Growth Push
Kavcıoğlu takes over after the pace of inflation accelerated for a fifth month in February to nearly 16%. The currency has taken one of the worst hits among peers from climbing U.S. Treasury yields, slumping more than 7% since mid-February and adding to calls for Ağbal to backstop the market with higher rates.
Despite the recent decline, the lira strengthened around 18% under Ağbal’s brief tenure, as expectations grew that he’d return to more orthodox monetary policies and resist political pressure for lower borrowing costs.
The government’s growth push in 2020 saw the currency weaken by 20% against the dollar, keeping consumer inflation in double digits for the entire year. But the economy eked out an expansion of 1.8% despite the impact of the coronavirus pandemic and associated lockdowns, and grew 5.9% in the fourth quarter, faster than all other Group of 20 nations except China.
Turkey should abandon tight monetary policy and focus on supporting investment, exports and employment that contribute to growth, Kavcıoğlu said in a recent column. “We’ve got to give up on interest-rate increases and bring borrowing costs, which directly impact investment and production costs, to reasonable levels,” he wrote in Yeni Şafak on March 9.
Reserves Policy
Kavcıoğlu, who’s also a former lawmaker for the ruling Ak Party, defended reserve policies executed from 2018 to 2020, when Turkey began spending its foreign-currency reserves to try and prop up the lira in times of volatility. It also borrowed tens of billions of dollars through swap agreements with commercial lenders.
Turkey’s total gross reserves, including gold and reserves held by the central bank on behalf of commercial lenders, dropped 20% last year until Ağbal’s appointment to $85.2 billion, while net foreign-exchange reserves fell by more than half to $19.6 billion.
The use of the central bank’s foreign-exchange coffers at the time helped to rein in inflation, interest rates and the exchange rate, Kavcıoğlu said. Goldman Sachs Group Inc. economists estimate the interventions exceeded $100 billion last year alone.