Sahap Kavcioglu
Photographer: Mustafa Ciftci / Anadolu Agency / Getty Images
Photographer: Mustafa Ciftci / Anadolu Agency / Getty Images
Two days after a larger-than-expected rate hike, Turkish President Recep Tayyip Erdogan removed the country’s third central bank governor in less than two years and replaced him with a proponent of lower rates.
Erdogan fired Governor Naci Agbal, who was appointed in November, and gave the job to Sahap Kavcioglu, according to a decision published in the Government Gazette at midnight on Saturday. Agbal’s sudden removal comes on the heels of a 200 basis point rate hike on Thursday by the central bank, which is double what was expected in a Bloomberg survey.
Agbal took over as Turkey’s top banker after weeks of declines in the lira and the standard one – week repo rate increased by a cumulative 875 basis points, increasing the damaged credibility of the central bank among investors. Erdogan, who supports an unconventional theory that high rates cause inflation, often reprimanded the central bank for years when he thought he was setting borrowing costs too high.
Kavcioglu is a professor of banking at Marmara University in Istanbul and a columnist for the Yeni Safak newspaper. The newspaper criticized the monetary authority’s latest interest rate hike on its front page on Friday, saying the decision had “turned a deaf ear” to Turkey’s 83 million people, hurting economic growth and mainly London’s “hot money owners”. will benefit.
The Turkish government newspaper raises central bank rate hike
Interest rates
In a column published by Yeni Safak on February 9, Kavcioglu said it was ‘sad’ to see columnists, bankers and business organizations in Turkey seek economic stability at high interest rates, at a time when other countries are negative. had rates.
“The central bank should not insist on high interest rates,” he wrote. ‘If interest rates in the world are close to zero, raising interest rates here will not solve our economic problems. On the contrary, it will deepen them in the coming period. ”
He also seconded Erdogan’s unorthodox theory of the relationship between interest rates and inflation, saying that raising interest rates ‘would indirectly provide the way to increase inflation’. Most central bankers and economists around the world believe the opposite is true, and will argue to raise interest rates to try to control excessive inflation.
Growth boost
Kavcioglu takes over after accelerating the rate of inflation for a fifth month in February to almost 16%. The currency has had one of the worst hits among peers due to the rise in US Treasury yields, and has fallen by more than 7% since mid-February, asking Agbal to stop the market with higher rates.
Despite the recent decline, the lira strengthened about 18% during Agbal’s short tenure, as expectations grew that he would return to more orthodox monetary policy and resist political pressure for lower borrowing costs.
The growth push of the government in 2020 weakened the currency by 20% against the dollar, which kept consumer inflation in double digits throughout the year. But the economy showed a 1.8% expansion despite the impact of the coronavirus pandemic and associated closures, and grew by 5.9% in the fourth quarter, faster than any other group of 20 countries except China.
Turkey needs to abandon strict monetary policy and focus on supporting investment, exports and employment that contribute to growth, Kavcigolu said in a recent column. “We need to give up interest rate hikes and bring borrowing costs, which directly affect investment and production costs, to reasonable levels,” he wrote in Yeni Safak on March 9.
Reserve policy
Kavcioglu, who was also a former lawmaker for the ruling AK Party, defended the reserve policy carried out from 2018 to 2020, when Turkey began spending its foreign exchange reserves trying to build up the lira in times of volatility. It also borrowed ten billion dollars through swap agreements with commercial lenders.
Turkey’s total gross reserves, including gold and reserves held by the central bank on behalf of commercial lenders, fell by 20% last year to Agbal’s appointment to $ 85.2 billion, while net foreign exchange reserves fell by more than half. to $ 19.6 billion.
The use of the central bank’s currency at the time helped curb inflation, interest rates and the exchange rate, Kavcigolu said. Economists at Goldman Sachs Group Inc. estimates that the interventions alone exceeded $ 100 billion last year.
(Updates with economic background, markets from the eighth paragraph)