Erdoğan’s decision to sack central bank chief a huge blow to independence - economists

(Updated with additional comments)

Turkish President Recep Tayyip Erdoğan, in a move that will have serious consequences for the country according to critics, removed Murat Çetinkaya from his post as the governor of the Central Bank of Turkey, according to a presidential decree published on the official gazette on Saturday.

Çetinkaya, whose term was due to end in 2020, was replaced with the bank’s deputy governor, Murat Uysal. The new governor said in a written statement that the bank would “independently implement monetary policy instruments focused on achieving and maintaining its primary objective of price stability.’’

The move has been met with strong reactions. Economists say Erdoğan significantly damaged the independence of the central bank by sacking Çetinkaya without giving any official reason for the change.

Two sources in the Turkish government told Reuters that differences over the conduct of monetary policy was the reason behind the move. 

“The difference of opinions between the governor and the ministers in charge of the economy has deepened in the recent period,” Reuters quoted one of the sources as saying. 

Erdoğan, who is known for his unorthodox economic policy ideas, has numerous times criticised the central bank for keeping interest rates high. 

The bank has been keeping its benchmark rate unchanged since it increased the rate by 625 basis points to 24 percent in September to prevent a full-blown financial crisis, as the Turkish lira hit record lows following a diplomatic row between Ankara and Washington over the near two-year detention of an American pastor.

“I agree with the concept of the central bank’s independence. But I should state this clearly: I am against interest rate policies, especially high interest rate policies,” the Turkish president said last month. 

“The president and the finance minister demanded his resignation, but Çetinkaya reminded of the bank’s independence and declined to resign,” another source told Reuters. 

Turkey’s inflation rate fell to 15.7 percent in June. It the lowest reading since June last year and below the government’s year end-goal of 15.9 percent. The sharp fall in inflation rate has made a rate reduction by the central bank at a July 25 meeting more likely according to analysts.

Bloomberg said Erdoğan’s move might lead to a market backlash weeks before policy makers were expected to start interest-rate cuts. “The shock ouster reignites investors’ concern about the central bank’s independence, and may derail a rally in the lira that started at the beginning of May,” it said. 

Uysal, who had served as deputy governor since June 2016, will hold a press conference in the coming days according to the written statement shared on Saturday.

“The independence of the central bank granted in 2001 officially ended. It is legalised,” said economist Ümit Akçay on Twitter on Erdoğan’s decision.

“Removing the central bank’s governor in this manner will deal a big blow to its institutional structure, capacity and independence,” Ibrahim Turhan, a former deputy central bank governor, said on Twitter.

Mahfi Eğilmez, a well-known economist in Turkey, said the governor was sacked because of failing to meet the targets set by the government. “The target was wrong. The finance policy was directed to the exact opposite of the monetary policy target,” he said on Twitter. 

According to Uğur Gürses, formerly the top columnist on economic affairs for Hürriyet newspaper, the appointment is not legal as a presidential degree is not above the law which allows central bank governors to be removed only when involved in prohibited activities, such as holding shares in a commercial lender.

“The central bank governor is not the one politically responsible of economic policy,” Gürses said on Twitter. According to the economist, Erdoğan should have sacked instead the Minister of Treasury and Finance Berat Albayrak, who is also his son-in-law.

“Those who removed the central bank governor overnight have lost the right to demand confidence in the country’s economy. The central bank is a captive being kept in the palace,” said Faik Öztrak, a former treasury undersecretary now serving as the main opposition Republican People's Party's (CHP) deputy chairperson.

Eser Karakaş, an economist and a contributor of Ahval, said the firing of the governor of the Central Bank of Turkey gave to the market the political signal that in the near future the political advantages of lower unemployment were higher than those of economic stability and lower inflation rate. The economist said Erdoğan’s move indicated that Turkey might be heading to new presidential and parliamentary elections well before 2023.

According to Nesrin Nas, a former politician and a contributor of Ahval, the central bank’s decision to keep its benchmark rate constant in early June in order to contain the risks to the pricing behaviour and to reinforce the disinflation process was the key factor that prompted Erdoğan to oust Çetinkaya.

Nas said Erdoğan had seemed to be losing his temper after the ruling Justice and Development Party (AKP) lost the control in five of the Turkey’s six most populous cities, including Istanbul and Ankara, in local polls. 

“The central bank’s governor is not the one and only authority who is responsible of terrible economic conditions. The main responsibility lies with Erdogan who used the central bank and the treasury resources to drag the country into eight elections in five years for his own ends,” Nas said.

Barış Soydan, a columnist of T24, said Çetinkaya’s dismissal was interesting as his appointment in 2016 had been interpreted by the markets as Erdoğan’s move to take control of the monetary policy and to push for lower interest rates. 

Some criticised the appointment at the time saying that Çetinkaya, who holds a dual degree in international relations and sociology from the Turkey’s prestigious Boğaziçi University, did that have the necessary background to head the central bank. Before his appointment as a deputy governor at the central bank in June 2012, he worked in Islamic banking and at state-owned Halkbank. 

“During the term of Çetinkaya, the credibility of the central bank has been significantly eroded. This happened because (his appointment) was seen as a signal that the government did whatever it wanted,” Soydan said. 

According to Zülfikar Doğan, Ahval’s Ankara representative, by removing Çetinkaya with a presidential decree and ignoring the criteria set in the laws, the government says to the former governor “you could not handle this job, you failed” and shows that no state institution or senior bureaucrat works under legally established guarantees.

“Çetinkaya, who did not resist and remained silent to the government’s decision to transfer the central bank’s profits to the budget four months earlier and to transfer the emergency reserves of the bank, which was never touched by any Turkish government for 59 years, failed to satisfy Erdoğan nevertheless,” Doğan said. 

Doğan said backstage rumours in Ankara focused on the possibility that Erdoğan had chosen the Çetinkaya as the scapegoat rather than accepting Albayrak’s failure and removing the minister. 

The first job of the new governor of the central bank will be to announce rate cuts and start monetary expansion in order to please Erdoğan, the journalist said. 

“We can foresee from today on that the Erdoğan government, which has been facing a financial bottleneck, will now use the resources of the central bank as it pleases and the bank’s money printing office will be instructed to work in full capacity with four shifts a day,” Doğan said. 

Güldem Atabay, an economist and contributor of Ahval, shares Doğan’s opinions. According to the economist, Erdoğan will now take full control of the monetary policy, will not remove his son-in-law Albayrak in the cabinet reshuffle expected to be announced in a short time, while the resources of the Turkish Treasury will be tapped to serve the ruling AKP ranks and Turkey will witness a process of rapid rate cuts by the central bank. 

“That can only mean the President is gearing up or laying the ground for an extraordinary period in Turkey’s politics amid ongoing tensions over the planned S-400 purchase and the expected rough competition from within the AKP ranks,” the economist said.

Turkey risks expulsion form the F-35 programme and further U.S. sanctions over its decision to acquire Russian S-400 missile defence systems, which Washington says could access to sensitive information on stealth fighter jets. Despite pressure from Washington, Erdoğan has not reneged on plans to purchase Russian systems and the delivery of the first S-400 system will begin on Sunday.

Meanwhile, former ranking officials of the ruling party, former Deputy Prime Minister Ali Babacan and former President Abdullah Gül, have stepped up efforts to establish a new centrist-liberal party to challenge Erdoğan after losses in local polls.

“Needless to say, Turkey’s chronic economic troubles will become acute sooner than later, given Erdogan’s mismanagement,” Atabay said. 

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