Two days after Turkey’s central bank raised a benchmark interest rate, Recip Erdogan, the country’s president, fired Naci Agbal, the bank’s governor, whom Erdogan had appointed to the post in November.
Erdogan gave no reason for dismissing his chief banker.
After Agbal was sacked, Turkey’s lira lost as much as 14 percent of its value against the U.S. dollar.
Agbal had been a surprise choice for the post: he was vocally opposed to Erdogan’s policy of keeping interest rates low to spur economic growth, even as inflation skyrocketed.
After raising its benchmark one-week repo interest rate by 6.75 percentage points to 17 percent on 18 February, Turkey’s central bank boosted the rate again last week, this time to 19 percent, to give investors a return higher than the country’s galloping inflation rate now at 15.6 percent.
An earlier Bloomberg poll of economists found a consensus view that the bank would add only 1 percentage point to the rate.
The lira gained 2 percent on the news, strengthening to 7.31 against the dollar, although, as of 19 March, the lira remained 5 percent under its 2021 high.
The central bank’s target inflation rate is 9.4 percent by the end of this year and 4 percent longer-term.
The bank “has decided to implement a front-loaded and strong additional monetary tightening,” its monetary policy committee said in a statement following the rate hike.
“If you abandon a tight policy stance ... at an early stage, past experiences show that inflation moves upward again,” Agbal told Reuters in February.
“The tight monetary policy will be maintained decisively… for an extended period until…a permanent fall in inflation and price stability,” the committee’s statement said.
That statement may no longer be true.
Erdogan dumped Agbal on 21 March and immediately replaced him with Sahap Kavcioglu, an economics professor who has held several posts in Erdogan’s economics bureaucracy and who has opposed Agbal’s policy of higher rates.
“While interest rates are close to zero in the world, opting for a rate hike for us will not solve economic problems,” Kavcioglu wrote in a February newspaper commentary.
Rate hikes will “indirectly cause inflation to rise,” he said, mirroring Erdogan's belief.
Kavcioglu is the bank’s fourth governor in five years.
TREND FORECAST: As we note in this Trends Journal, the sinking lira and rising inflation are symptoms of a much more troubling Turkish socioeconomic and geopolitical environment. (See our new article, “TURKEY: NO POLITICAL OPPOSITION PERMITTED.”)
And, as the global economy decelerates and inflation keeps rising across the globe, there will be continued downward pressure on the lira and the Turkish economy.