Bank Chief Picked by Erdogan Returns to Policy Mainstream


Turkey’s central bank took a major step back toward mainstream policy making with the tacit endorsement of longtime skeptic President Recep Tayyip Erdogan, raising interest rates by the most in over two years and spurring a rally in the currency.

The Monetary Policy Committee led by Governor Naci Agbal on Thursday lifted the one-week repo rate to 15% from 10.25%, as forecast by most analysts polled by Bloomberg. The move brings the benchmark 20 basis points higher than the central bank’s weighted average cost of funding, which Oxford Economics said “translates into a symbolic tightening.”

Bank Chief Picked by Erdogan Returns to Policy Mainstream

More importantly, the central bank said all funding will be provided through the main policy rate, ending a complex structure criticized by investors for its lack of transparency. It will start to extend liquidity at its cheapest rate on Friday for the first time since suspending one-week repo auctions in August.

Bank Chief Picked by Erdogan Returns to Policy Mainstream

“The Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process,” the central bank said in a statement.

The decision suggests that unlike his recent predecessors, Agbal -- appointed this month as part of a sweeping overhaul of Turkey’s economic decision makers -- has Erdogan’s backing for a more orthodox effort to protect the lira and curb inflation.

What Bloomberg Economics Says...

“Financial markets had high expectations for Naci Agbal, Turkey’s new central bank governor, and he delivered. He restored predictability in monetary policy by re-instating the one-week repo rate as the main policy tool. He also bought some credibility with a hefty rate hike.”

-- Ziad Daoud, chief emerging markets economist

For the full note, click here

After long advocating the theory that high interest rates cause inflation rather than curb it, the president pledged to support his new economic managers with market-friendly policies following declines in the currency to record lows.

The lira rallied as much as 2.5% against the dollar after the decision. It then pared gains and was trading 1.6% stronger at 8:10 p.m. in Istanbul.

Restoring Credibility

“Agbal made the first important step to restore the shattered credibility of Turkey’s central bank by delivering a proper rate hike and simplifying monetary policy,” said Piotr Matys, a London-based strategist at Rabobank. “The initial market reaction implies that this should be enough for the lira to maintain its bullish momentum.”

Agbal inherited a complicated funding structure from his predecessor Murat Uysal, who in August returned the bank to utilizing backdoor tightening through fringe tools.

Uysal’s approach lifted the average cost of funding to 14.8% on Wednesday, from less than half that level in July. But even supported by state lenders’ unannounced interventions in foreign-exchange markets using central bank reserves, it failed to stem the lira’s collapse.

With inflation in double digits for much of this year, the real interest rate was negative. The currency performed worst among emerging markets peers in 2020 up until Agbal’s appointment on Nov. 7 and the resignation soon after of the president’s son-in-law as economy minister.

Bank Chief Picked by Erdogan Returns to Policy Mainstream

Shortly before he was sworn in with sweeping authority in 2018, Erdogan promised to seize control of monetary policy to implement his unorthodox views on interest rates and prices. Turkish markets were routinely hammered over the following two years.

Last week, with the lira way above 8 to the dollar, he changed tack, sparking optimism Turkey will allow interest rates to rise to offer a sufficient inflation-adjusted return. “Like everywhere else around the world, in our country it is the central bank’s job to determine and implement policies needed to curb inflation,” Erdogan told lawmakers from his AK Party.

Thursday’s move to only use the one-week repo to fund commercial banks will help make policy more predictable, something economists have been calling for.

“The repo rate is now in line with market rates, so the net tightening is minimal,” said Nigel Rendell, a senior analyst at Medley Global Advisors. “At least the market is relieved over the fact that the central bank is returning to a conventional monetary policy.”

©2020 Bloomberg L.P.

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