Erdoğan sacks central bank chief after Turkish lira slumps

Turkish President Recep Tayyip Erdoğan sacked and replaced the governor of the central bank after the lira slid to successive record lows against the dollar.

Erdoğan dismissed Governor Murat Uysal via a presidential decree early on Saturday, appointing former Finance Minister Naci Ağbal in his place. He gave no reason for the dismissal.

Ağbal becomes the third governor of Turkey’s central bank in 16 months. Erdoğan sacked and replaced Uysal’s predecessor Murat Çetinkaya in July last year and threatened further dismissals should bank officials fail to support his government’s pro-economic growth policies.

The Turkish lira has slid by 30 percent against the dollar this year, the worst performance in major emerging markets, raising spectre of a repeat of a currency crisis in 2018. Losses have accelerated since the central bank decided to keep the benchmark interest rate on hold at 10.25 percent at a meeting on Oct. 22. Most economists had expected a hike, pointing to the lira’s losses and a 2-percentage point increase in September, the first in two years.

Erdoğan opposes increases in interest rates saying they are inflationary, suggesting that Ağbal’s ability to contain further losses for the lira through higher borrowing costs may be undercut.

Turkish Treasury and Finance Minister Berat Albayrak, Erdoğan’s son-in-law, has said he is seeking a “competitive currency” to help bolster exports and economic growth. This week, he told members of the governing Justice and Development Party (AKP) that the Turkish authorities would not intervene in the currency markets unless there was an emergency, according to local media. Higher interest rates hurt the economy, he said.

naci ağbal
Newly-appointed Turkish Central Bank Governor Naci Ağbal

The government has used lower interest rates in the country to engineer a borrowing boom among consumers and businesses. But the policy has widened the country’s current account deficit sharply after demand for imports surged.  

Investors are warning that the central bank’s failure to hike interest rates substantially could send the economy off the rails. The benchmark interest rate sits below the annual consumer price inflation rate of 11.9 percent. Earlier this week, Dutch bank Rabobank said a rate hike of at least 5 percentage points would probably be needed to steady the lira.

The lira dropped to a record low of 8.5778 per dollar on Friday. It clawed back some of those losses later in the day, closing the week down 1.2 percent at 8.5243 per dollar.

London-based research firm Capital Economics said there was an increased likelihood of a repeat of the 2018 currency crisis because of central bank inaction. The turmoil two years ago, partly caused by an overheating economy, resulted in a deep economic recession.

“The political backdrop means that there is a good chance that policymakers would fail to do enough to soothe investors and another currency crisis ensues,” Jason Tuvey, senior emerging markets economist at the company, said in a report to clients this week.

Ağbal, 52, served as finance minister between November 2015 and July 2018, before becoming the chief of Erdoğan’s Directorate of Presidential Strategy and Budget. He served as undersecretary of the Finance Ministry between 2009 and 2015, earning the respect of foreign investors by helping to reform the ministry and ensure budget discipline.  

The central bank has “limited independence” from political pressure for lower interest rates, Douglas Winslow, the main analyst on Turkey for credit ratings agency Fitch, told Reuters in an interview published on Friday. “A track record of being slow to respond to events” raises the risk of market instability, he said.

Instead of raising its benchmark interest rate, the central bank has increased average borrowing costs for banks within a so-called interest rate corridor. The borrowing costs have increased to more than 13 percent from around 7.5 percent in July as the central bank suspended lending at lower rates of interest.

Monetary policymakers are next due to meet on interest rates on Nov. 19.