Murat Çetinkaya refuses to obey president’s demand to lower interest rates, and economists now fear loss of confidence in lira
[Istanbul] The Turkish currency took a hit on Monday as markets reacted for the first time since President Recep Tayyip Erdogan fired the head of the central bank on July 6, a move that will increase concerns over the independence of the country’s monetary policy, analysts have told The Media Line.
The lira lost over 2 percent of its value against the dollar as Turkish markets opened on Monday morning, while at one point it lost 3% in Asia trading.
The Turkish newspaper Hurriyet Daily News reported on Sunday that according to Erdogan, Murat Çetinkaya was fired because he would not lower interest rates.
The firing has led to concerns that Turkey is continuing to apply unorthodox economic polices and could go toward looser economic programs, according to Merve Hande Akmehmet, a Washington-based economist focusing on Turkey.
“I think it’s definitely going to damage the confidence of foreign investors even more,” she told The Media Line.
Akmehmet stated that the firing would lead to the perception that Turkey’s economic policy was following Erdogan’s will, going against the long-standing principle that a central bank should be independent. She added that decreasing interest rates might ease pressure on the economy in the short-term, but would inevitably lead to more inflation.
“It will make things worse in the future,” she said.
Interest rates increased in response to a currency crisis last year, when the Turkish lira lost nearly 30% of its value.
Erodgan wants the interest rates lowered in the belief that it fuels economic growth, but instead, it will likely increase Turkey’s debt burden while lowering the value of the lira.
The announcement of the firing came by a presidential decree published on Saturday.
Çetinkaya, whose term as head of the central bank was to end in 2020, will be replaced by his deputy, Murat Uysal. The new bank head will likely be more willing to follow Erdogan’s wishes with lowering interest rates, stated Nafez Zouk, lead economist of emerging markets at Oxford Economics, based in London.
“We had become accustomed to a Turkish central bank with eroded credibility, but firing its governor leaves very little by way of confidence in the future of Turkey’s monetary policy,” Zouk wrote to The Media Line in a Twitter message.
“There is [likely] to be even greater interference in economic policy setting,” he predicted
Zouk added that Erdogan had been expected to go back to more orthodox economic policies after the recent municipal elections, but the firing of Çetinkaya seems to signal that this will not be the case.
Turkey’s economic growth has been largely dependent on foreign investors, yet decreasing the central bank’s independence will make them less willing to put money into the country, hence making it harder to return to growth, he said.
“When a basic anchor such as independence of the central bank is tempered with, that capital will be much slower to arrive,” Zouk added.
Last year’s currency free-fall led to inflation, rising food prices and a recession at the end of 2018. The crisis largely contributed to Erdogan’s party losing the mayoral races for Ankara and Istanbul, in one of the biggest political defeats for the Turkish president since he came to power.
Timothy Ash, an economist who focuses on Turkey for BlueBay Asset Management in London, agreed that Erdogan was expected to go back to orthodox monetary policy once the elections were over, but the replacement of the governor has gone against that assumption.
“It’s a risky move,” Ash told The Media Line.
He said that Çetinkaya’s dismissal wasn’t entirely surprising as there have long been rumors that he would be replaced before his four-year term was up.
However, Ash said it was odd to replace him with a high-ranking official in the central bank rather than choosing someone outside the institution who would be more in line with fiscally orthodox rules. Such an official would eventually be better able to cut rates because markets would have more trust in him.
The firing comes at an especially sensitive time.
Turkey is expected to receive Russia’s S-400 missile defense system this month, which will likely lead to a major crisis with the United States. Washington is concerned that its military secrets could be jeopardized if Turkey, a NATO country, uses Russian weapons alongside those from the US.
Washington has already started the process of taking Turkey out of the F-35 fighter jet program, and could impose sanctions.
Turkey’s currency crisis last year was partly fueled by the US implementing limited sanctions over a diplomatic row with Ankara.
Ash stated that the sanctions would likely be tougher this year. However, the global economic climate was now more favorable to Turkey and the country’s current deficit is lower, so the fallout might not be as severe.
“A year later the economy has rebalanced significantly,” he stated. “That helps [the Turkish government], but they have little creditability. This [firing] is not helpful – that’s pretty clear.”