President Recep Tayyip Erdogan abruptly sacked Turkey’s central bank chief on Saturday, two days after a sharp interest rate hike to head off inflation, replacing him with a former ruling party lawmaker and critic of tight monetary policy.
Sahap Kavcioglu, a former member of parliament for Erdogan’s AK Party, replaces Naci Agbal who was appointed less than five months ago. Below are some reactions from analysts:
Selva Demiralp, director of the Koc University-Tusiad Economic Research Forum, in Istanbul:
“This move clarifies what the president meant by ‘putting price stability aside’ when he announced the economic reform package last Friday. It is worrisome because I now expect economic policy to literally put price stability aside.
“This implies that the government will once again try to stimulate the economy by low interest rate policies. However, pushing short term stimulus against longer term risks can not be a hand that can be overplayed. I am worried because such a priority has a high potential to backfire by causing extreme pressures on the TL (Turkish lira) and contracting the economy even further.
“Agbal was one of the most successful central bank governors appointed by the AK Party. He adopted a long term perspective, a conventional approach with clear communication. He took over an economy at the edge of the cliff and took the right steps to reestablish credibility from zero. Unfortunately, he is not given a chance to finish what he started.”
Cristian Maggio, head of emerging market strategy at TD Securities:
“This announcement demonstrates the erratic nature of policy decisions in Turkey, especially with regard to monetary matters. Kavcioglu’s appointment would suggest a higher risk of reverting to looser, unorthodox, and eventually mostly pro-growth policies from now on.
“The Turkish lira may easily sell-off 10-15%.... We will see this start on Monday, when Asia trading kicks in. The (central bank) and other Turkish authorities will try to lean against this move, likely deploying an array of measures. They may be somewhat effective for a start, but we question their ability to be successful for long in the current environment.”
Wolfango Piccoli, co-president of Risk Advisory Teneo:
“There are no institutions left in the country with any sort of independence and authority ... Erdogan is playing with fire at the worst possible time given (the) fragility of the key external backdrop.”
Jason Tuvey, analyst, Capital Economics:
The move is “likely to trigger large falls in the lira when markets open on Monday. It looks like the central bank’s efforts to fight the country’s inflation problem may come to an end, and a messy balance of payments crisis has become (once again) a real possibility.
“President Erdogan’s move leaves little doubt that all of the power in Turkey rests with him and this will result in rate cuts. This will simply make Turkey’s inflation problem even worse and risk premia on Turkish assets are likely to rise sharply.”
Tim Ash, senior EM sovereign strategist, Bluebay Asset Management:
“This decision is almost as bad as Brexit in terms of being the worst public policy decision I can remember in a country’s history ... Markets will express their opinions on Monday and it is likely to be an ugly reaction.”
