The Turkish lira hit a record low overnight after President Recep Tayyip Erdogan ordered another round of layoffs at the country’s central bank.
In an overnight decree published hours after meeting Sahap Kavcioglu, the bank’s governor, Erdogan deposed two deputy governors.
One of them, Ugur Namik Kucuk, was the only member of the bank’s seven-member monetary policy committee to oppose a rate cut that shocked international investors last month, according to two people familiar with the matter.
“He was the one who voted against the rate cut decision, so it’s a shame for him and for the country,” said an Istanbul banker.
Kucuk also opposed the controversial policy of selling the bank’s foreign exchange reserves in a doomed bid to support the lira, the banker added. The policy started at the beginning of 2019 and continued until the end of last year.
The second sacked vice governor, Semih Tumen, was rumored to be lining up to succeed Kavcioglu.
Erdogan, who has ruled Turkey for nearly two decades, has gained unprecedented control over the nominally independent central bank in recent years after taking steps to consolidate his own powers.
The president, an opponent of high interest rates, has clashed with a succession of governors because he wanted to prioritize high growth — including rising inflation — at all costs. He has fired the central bank chief three times since mid-2019 and fired a number of other officials.
Abdullah Yavas, a longtime member of the monetary policy committee who had been criticized in the Turkish media for living in the US, was also fired by Erdogan on Wednesday night.
During overnight trading, the lira, already under pressure due to a strong US dollar and investor concerns about Turkey’s economic and foreign policy, fell 1 percent to 9.19 TL against the dollar. The coin suffered a bruise for a few years and has lost 59 percent of its value against the dollar since early 2018.
During early European trading on Thursday, the lira stood at TL9.14 against the dollar.
The lira came under pressure last week after Reuters reported that Erdogan had lost confidence in Kavcioglu, who was appointed head of the central bank in March, even though he cut the bank’s benchmark rate to 18 percent on the bank last month. when annual inflation was high. runs at 19 percent.
The president’s chief of communications rejected that claim, and Wednesday’s meeting between Erdogan and Kavcioglu, announced by the president’s office, was interpreted by investors as showing support for the governor.
Kucuk was a well-known figure in the international financial community. A former chief economist at the private Garanti bank, he often took the lead in answering questions during the central bank’s regular video conferences with foreign investors. Market participants were struck by his absence from a meeting that took place last week.
Taha Cakmak, a former official at Ziraat Bank and Turkey’s banking regulator, has been appointed as the new deputy governor. Yusuf Tuna, an academic at Istanbul Commerce University, was appointed to the monetary policy committee.
Hakan Kara, who served as chief economist at the central bank until he was fired in 2019, said there was “no trace of institutional memory” in the monetary policy committee after the layoffs. But he added that it was “no longer necessary anyway” because decisions about interest rates were no longer made by the bank itself.
Piotr Matys, a senior FX analyst at In Touch Capital Markets, said the realignment “strengthens Governor Kavcioglu’s position”. He predicted further rate cuts would come, fueling further losses of the lira and fueling inflation.
“If the lira were significantly overvalued, cutting interest rates would be a justified strategy,” he said. “However, this is not the case. At a time when global commodity prices are high and could rise further, Turkey needs a stable or even stronger currency.”
Many foreign investors have already taken their money out of Turkey in response to what they see as unconventional and unpredictable policy making. According to central bank data, foreign investors held only $6 billion in government bonds at the end of the second quarter of 2021, compared to $61.5 billion at the same time in 2013.
That means the impact of the declining currency will be felt mainly domestically in the form of higher energy costs in a country that imports almost all of its oil and gas. That, in turn, threatens to fuel inflation, which has become a political headache for President Erdogan given deep public discontent over the rising cost of food and other basic commodities.