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Erdogan Fires Central Bank Head After Lira Hits Record Low

Taylan Bilgic and Cagan Koc
·5 min read

(Bloomberg) -- Turkish President Recep Tayyip Erdogan fired the country’s central bank governor, the second time in 16 months he’s ousted the top monetary official, as a series of interest rate increases failed to halt the lira’s slide to a record low.

Erdogan appointed former Finance Minister Naci Agbal to replace Murat Uysal, who had run the central bank for just over a year.

Agbal has no prior experience in monetary policy, but is known as a market-friendly technocrat. Analysts predicted he would keep raising rates to defend the lira and pacify investors despite having to manage pressure from Erdogan to support economic growth.

Uysal’s abrupt removal follows weeks of declines in the currency, which fell to a record low on Friday. The lira is the worst-performing emerging markets currency of 2020, falling more than 30% against the dollar.

Uysal had been raising borrowing costs through a mix of rate increases and back-door measures since August, but it wasn’t enough to boost the currency or rein in inflation, which is now running at more than twice the official target of 5%. Sacking Uysal may signal a willingness to try to restore confidence by quickly hiking the benchmark rate, analysts said.

“The move, we think, prepares for large-scale tightening, possibly even this coming week,” said Cristian Maggio, head of emerging-market research at TD Securities in London.

Familiar Face

While Agbal is a household name for many Turkey watchers from his stint as finance minister that ended in 2018, the 52-year-old former bureaucrat has never served at the monetary authority. That said, Agbal worked with the likes of Mehmet Simsek and Ali Babacan, who were widely regarded as Erdogan’s former economic A-team and delivered years of solid economic growth.

There are signs Agbal was being groomed for the post. He has been getting routine briefings on monetary policy and the impact on fiscal discipline for more than a year now, according to a government official who has worked for years with the former minister.

Known for his preoccupation with disciplined spending, Agbal is also extremely attentive to the need to restore faith in the lira as exchange rate volatility feeds into inflation, the official said.

He was one of the earlier members of Erdogan’s ruling party and maintained his standing with the Turkish leader despite disagreements over policy making over the past years. While he is not known for having a confrontational approach to the president, he doesn’t shy away from expressing differences of opinion, the official said, asking not to be identified because of the sensitivity of the matter.

Before his appointment as the central bank governor, Agbal had been serving as head of the Presidency Budget and Strategy Office since 2018. That office, where Agbal will be succeeded by Ibrahim Senel, was expected to act as a key decision maker for fiscal matters under Turkey’s newly adopted executive presidency, but that transformation never really took place.

Competing Priorities

Despite their history, Agbal’s appointment puts the former finance minister in the uncomfortable position of dealing with demands from Erdogan for lower rates while trying to meet investors’ expectations to stabilize the currency. The Turkish president casts a long shadow over monetary policy and believes that high borrowing costs fuel inflation. Most central bankers around the world believe the opposite is true.

“Cannot be worse than Uysal, surely,” said Timothy Ash, a strategist at BlueBay Asset Management, in an emailed note. “Agbal has a reputation as a decent technocrat. He is orthodox in economic outlook. Cannot imagine he would have taken the job without a remit to be allowed to do the right thing.”

The prospect of a Joe Biden victory over Donald Trump in the U.S. election was already putting traders on alert for an emergency rate increase by Turkey’s central bank as the selloff in the lira showed no sign of slowing earlier this week.

“We think that a sharp one-week repo rate increase can be the right signal that the CBRT is now thinking in structural terms,” Maggio said, suggesting a hike of around 600 to 700 basis points.

Uysal himself was handpicked by Erdogan in July 2019 to replace a governor who had failed to comply with the president’s wishes to trim interest rates. He delivered nine rate cuts for a total of 1,575 basis points, leaving Turkey’s inflation-adjusted borrowing costs among the lowest in the world.

While that helped Erdogan’s government provide much-needed support to the $740 billion economy during the coronavirus pandemic, it also amplified inflationary pressures and weighed on the lira.

The central bank’s rate-setting committee led by Uysal gradually tightened monetary policy to stem the currency’s losses, but it often did so without outright hikes to the policy rate, drawing investors’ ire. Uysal surprised investors last month by holding the benchmark one-week repo rate, quashing hopes that the monetary authority was determined to tighten policy and curb inflation.

In his last public appearance as the governor last month, Uysal said he could tighten policy further to rein in inflation, which accelerated to 11.9% in October.

(Updates to highlight Agbal’s background from seventh paragraph.)

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