Another Day, Another Purge at Turkey’s Central Bank
(Bloomberg Opinion) -- Heads are rolling at Turkey’s central bank, this time for not lowering interest rates aggressively enough. Deeper cuts will likely come, perhaps as soon as next week. This is a dangerous game when most of the world is moving in the opposite direction. An already battered currency is unlikely to fare well, and whatever fragment of credibility that monetary policy has left in this iconic emerging market will be eroded.
Purges are a sad fact of life at the Central Bank of the Republic of Turkey. President Recep Tayyip Erdogan is on his fourth bank governor since 2019. In the latest clearing out, Erdogan dismissed two deputy governors and a Monetary Policy Committee member who either opposed or were perceived to be less than enthusiastic about the surprise rate reduction delivered on Sept. 23. The firings were announced midnight Thursday.
The core of the problem isn’t Erdogan’s detestation of high interest rates, well known as that loathing is. The president appears to believe that fundamental aspects of economic and financial life can be controlled merely by shuffling personnel. Go one way this week, another route in six months time. While policy needs to be flexible and plenty of central banks have delivered U-turns over the years, Turkey swings between fighting inflation and stoking it with disturbing regularity. Governor Sahap Kavcioglu was appointed in March, accompanied by widespread expectations he would undo the rate hikes presided over by his sacked predecessor, Naci Agbal, which had so angered Erdogan. Agbal himself had the job for only a few months and was — ironically — thought to have a mandate to crush inflation, which necessitated much tighter policy.
Kavcioglu has to be worried about his own position. Reducing borrowing costs as soon as he walked in the door was a tough call because inflation was still too high, and he probably felt he needed to establish some credibility. He did cut last month, but the pace appears to have been too slow for Erdogan. A self-described “enemy” of interest rates, Erdogan espouses an unconventional theory that reducing interest rates will lead to lower inflation and not the other way around.
The lira is the worst performing emerging market currency this year, down 19% against the dollar and likely to drop further in the event rapid cuts materialize. That will exacerbate inflation and undermine confidence, almost inviting another U-turn. It begs the question, what does Erdogan want: No interest rates at all? Sounds far-fetched, but the seemingly endless personnel shifts make you wonder.
The outlook isn’t all bad for Turkey. Gross domestic product will increase 9% this year, according to International Monetary Fund forecasts published Tuesday, surpassing China and just a bit less than India. The clip will slow next year to a still respectable 3.3%. Inflation will remain stubbornly high, edging down only slightly to 15.4% next year from 17% in 2021.
Erdogan is swimming against the tide. Important markets like Brazil, Russia, South Korea, New Zealand and Norway are raising rates. The Federal Reserve is preparing to trim stimulus and other big guns are making similar noises. Turkey should be hiking, given the pace of price increases. For all the concern about inflation building in many economies, in Turkey it’s the real deal.
By the time Kavcioglu took the bank’s reins in March, the job had become so dangerous he almost needed a hazmat suit to walk in the building. Suppliers of protective clothing could do worse than stock up.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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