Running Turkey’s Central Bank Is a Most Perilous Assignment
An employee hands 100 Turkish lira banknotes to a customer on the counter inside a foreign currency exchange bureau in the Beyoglu district of of Istanbul. (Photographer: Kerem Uzel/Bloomberg)

Running Turkey’s Central Bank Is a Most Perilous Assignment

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Four months of monetary orthodoxy appears to have been too much for Recep Tayyip Erdogan.

In firing central bank chief Naci Agbal and installing a champion of low interest rates, Turkey’s president has blessed the withdrawal of at least some of the tough medicine Agbal meted out in his four-month tenure. His replacement, Sahap Kavcioglu, has been critical of the course his predecessor pursued. Erdogan is also prepared to undermine the relative stability that Agbal’s successive — and aggressive — rate increases brought to the Turkish lira. Soaring inflation gave the departing central bank chief little choice; it won’t abate just because there’s a new governor in town.

Much has been made of Agbal’s 200 basis point hike last week, which was twice what economists forecast. While this clearly risked provoking Erdogan — who has an unorthodox view that high interest rates cause, rather than quash, inflation — few leaders anywhere would have been comfortable with Turkey’s cumulative climb of 875 basis points since November. That’s especially true of Erdogan, who’s now on his fourth central banker in less than two years. 

The country’s benchmark rate now stands at 19%. That’s a lot for any economy or political system to absorb. Even Paul Volcker, the fabled former Federal Reserve chairman, didn’t keep rates at truly stratospheric levels for long during his attack on U.S. inflation in the early 1980s. The federal funds rate jumped to 20% in 1980, but was soon on its way down.

Was Turkey’s rate increase last week overkill? Agbal had already won markets over, without the need to go so far above expectations on March 18. Under his governorship, the lira had gone from being the worst-performing emerging-market currency in the third quarter to one of the best in the past three months. Arguably, those 200 extra basis points went beyond constraining price increases to aiming a dagger at inflation’s heart. Turkey’s inflation reached 15.6% in February. Even a modest hike would probably have kept the confidence of investors, given how microscopic interest rates are in advanced economies — and quite a few developing ones. (I wrote about that here.)

Whether or not Agbal pushed the envelope too far, nothing excuses the ham-handed manner of his ouster so soon after he was given the job. Being central bank head in Turkey must now qualify as one of the most perilous jobs in international economics. This is how a banana republic might behave, not a member of the Group of 20 major economies and the Organization for Economic Cooperation and Development.

The timing of Agbal’s dismissal, in the early hours of Saturday morning, meant Erdogan would have had some appreciation of the market tumult that would result, and the lira duly plunged on Monday. To try to ease investor concerns about whether controls on capital or the lira might be considered, Finance Minister Lutfi Elvan said the country would continue to stick to free markets and a liberal foreign-exchange regime.

The tragedy of Agbal’s departure is that Turkey’s economic prospects aren’t totally unfavorable. Gross domestic product expanded 5.9% in the fourth quarter from a year earlier, faster than anywhere in the G-20 with the exception of China. When the OECD upgraded global growth forecasts this month, Turkey was one of the big winners. GDP will likely rise 5.9% this year, almost double the previous estimate. That puts the country significantly ahead of emerging-market icons such as Indonesia, Mexico and Brazil. (That trio also don’t suffer from the same inflation as Turkey.)

Will Erdogan’s new man at the central bank reverse direction completely and take settings back to where they were in November, when Agbal was handed the reins? That seems unlikely. Policy was seen as a complete shambles then. Kavcioglu, an academic and columnist, may start by withdrawing last week’s rate hike, perhaps before the next scheduled meeting of the bank’s monetary policy committee in April. It won’t come without cost. Any person in that post faces losing either the lira or Erdogan, Bloomberg Economics’ Ziad Daoud wrote Saturday.

At least Kavcioglu knows who he has to please. Talk about a constituency of one.

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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