Jul 08 2019

Turkish lira slumps after Erdoğan dismisses central bank governor

Turkey’s lira slid on Monday after President Recep Tayyip Erdoğan dismissed the governor of the central bank, reportedly for failing to lower interest rates.

The lira dropped 2.5 percent to 5.76 per dollar as of 10:00 a.m. in Istanbul local time.

Erdoğan issued a presidential decree on Saturday firing Central Bank Governor Murat Çetinkaya, who was due to serve until 2020, and replacing him by his deputy Murat Uysal, a former official at a state-run bank. Uysal is known as a dovish member of the Monetary Policy Committee.

The Turkish president told a meeting of his party’s parliamentarians that he dismissed Çetinkaya for refusing the government’s repeated requests to cut rates, Hürriyet newspaper reported on Sunday.

Çetinkaya and his team hiked interest rates by 625 basis points to 24 percent in September to arrest a sell-off in the lira that threatened to turn into a full-blown financial crisis. It has left the benchmark rate on hold since, citing inflationary pressures and currency volatility, despite a sharp economic downturn.

The central bank could start reducing rates at its next Monetary Policy Committee meeting on July 25, economists have said.

"The assumption is the new guy was hired because he will cut rates on demand from the presidential palace," Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments to clients. But the risk is that it will be more difficult for Uysal to reduce rates because of the market reaction to the HR change, he said.

"An all round idiotic move," Ash said.

Çetinkaya’s dismissal also comes just days before Turkey will start taking delivery of Russian S-400 air defence missiles. The procurement has heightened political tensions with the United States and has sparked sales of the lira by investors. U.S. officials have threatened economic sanctions should delivery go ahead.

Erdoğan gave himself the power to hire and fire managers of the central bank last summer, when he assumed vast new presidential powers. He also appointed his son-in-law Berat Albayrak to head a merged treasury and ministry of finance.