Turkey's Erdogan Is Made to Wait for Cherished Rate Cut

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Recep Tayyip Erdogan will have to wait a while longer for that interest rate cut he desires. For the reduction’s failure to materialize Thursday, the Turkish president can thank — or blame — himself.

Turkey’s central bank kept its benchmark rate at 19% on Thursday. In their first meeting under governor Sahap Kavcioglu, officials reiterated their “primary objective of price stability’’ and pursuit of a “permanent fall in inflation.” In a concession to the rate-cut predilections of Erdogan, policy makers removed from their statement a commitment to tighten further if needed. 

While the rate decision matched economists’ forecasts, it’s nevertheless significant because it suggests Erdogan isn’t yet having entirely his own way at the monetary authority. Unhappy with the sharp rise in rates since November, the president fired then bank governor Naci Agbal on March 20 and installed Kavcioglu, an academic and columnist whose main credential appeared to be that he shared Erdogan's disdain for high borrowing costs. The ouster was contentious: Agbal jacked up rates in an effort to quash inflation, and earned praise from investors. To markets, he was a hero, and his exit triggered a rout in the lira.

The rate cut that was expected to follow Kavcioglu’s elevation will have to wait. Kavcioglu has sounded relatively hawkish in the few weeks he’s been in the job. If you’d been marooned on a desert island for a month without a cellphone and just got home, you’d be forgiven for thinking not much had changed.

There are compelling reasons for the central bank to balk at reductions. Inflation accelerated to 16.2% in March from a year earlier and the lira 
is the worst performing emerging market currency in the past month, down about 7.5%. The irony is that its dive was largely a result of Agbal’s dumping. So swift and sharp was the reaction to his exit that the central bank had little choice Thursday other than to hold the line, if officials wished to prevent a further sell-off. 

Steep reductions are a tough sell in this global environment. Bond yields have climbed around the world on expectations that a rapid economic rebound will fuel a spurt in inflation. The central banks that have actually responded, as opposed to just signaling higher rates, are in the developing world. Russia and Brazil recently pushed borrowing costs higher. Turkey's own growth outlook is impressive. Gross domestic product will expand 6% this year, the International Monetary Fund forecast last week, among the fastest clips in emerging markets. 

That’s not an argument against some rate cuts in Turkey. As I wrote here, few political systems can handle rates this high for very long without strain. Turkey’s can still be among the highest in the world and fall a little. That’s the tragedy of Erdogan’s purge at the central bank. By punishing Agbal for his hikes, he created a situation that makes it tricky for Agbal’s successor to undo his work. 

Erdogan is left with Agbal-lite. I doubt the departed central bank chief would have raised rates Thursday after a surprisingly large increase of 200 basis points in March. The extent of that hike was probably his unmaking. Erdogan needed someone with inflation-fighter credentials, and Agbal gave him that for a few months. The president just didn’t want too much of it. 

It’s possible that Erdogan considers the market upheaval an acceptable price to have his own man. There’s little chance Kavcioglu will go rogue, having seen what happened to his predecessor. The next change in rates is likely to be the cut pined for in the presidential suite. But appearances, in the monetary realm, count for a lot. Kavcioglu needs a decent interval for things to settle down. Then he’ll do what Erdogan requires.

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.

©2021 Bloomberg L.P.

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