Turkish lira dives after Erdoğan fires bank officials opposed to rate cuts

Turkey’s lira slumped, hitting fresh record lows against the dollar, after President Recep Tayyip Erdoğan fired three central bank officials opposed to reductions in interest rates.

The lira dropped to as low as 9.187 per dollar, extending losses this year to almost 20 percent. It was trading down 0.8 percent at 9.148 against the U.S. currency at 11:48 a.m. in Istanbul local time.

Erdoğan dismissed the central bank officials, who included two deputy governors, by presidential decree after summoning governor Şahap Kavcıoğlu to his palace for a meeting on Wednesday evening. The two discussed changes to the bank’s Monetary Policy Committee, which holds monthly meetings to set interest rates, as well as the general economic situation.

Erdoğan, a devout Muslim, describes himself as an enemy of interest rates, claiming that higher rates are inflationary. His view jars with conventional economic wisdom that states a central bank can hike borrowing costs to curb price rises. Kavcıoğlu, appointed by Erdoğan in March, surprised investors by lowering rates to 18 percent from 19 percent last month. He is the fourth central bank governor in less than three years.

Turkey will continue its “battle against the interest rate lobby” without pause, said Yigit Bulut, a chief economic adviser to Erdoğan, according to local news wire Foreks. Erdoğan claims that a clandestine group of bankers is seeking to keep Turkey’s economy captive with higher borrowing costs.

"Simply mad," Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments. "It's gone from bad to worse at the CBRT... All very worrying for Turkey."

The central bank is cutting interest rates despite a spike in inflation. Consumer price inflation in Turkey reached an annual 19.58 percent in September, the highest level in emerging markets outside of crisis-hit Argentina.

Erdoğan fired deputy governors Semih Tümen and Uğur Namik Küçük in the midnight decree. He also dismissed Abdullah Yavaş, another member of the Monetary Policy Committee. He appointed Taha Çakmak as deputy governor and Yusuf Tuna as an MPC member, according to the decree.

Tuna, an academic, has previously called for big cuts to interest rates, and has said the central bank should be subordinate to the government and act "bravely" in monetary policy. 

The changes to the MPC rid the committee of officials who disagreed with Erdoğan’s calls for lower interest rates, Bloomberg reported on Wednesday, citing people familiar with the committee’s composition. Küçük was the only MPC member who voted against last month’s interest rate cut, while Yavaş did not vote because he had contracted COVID-19 in the United States, Bloomberg said.

The MPC will convene to decide on interest rates next Thursday.

The central bank is expected to cut rates by a further 50 basis points, or 0.5 percentage points, to 17.5 percent, Foreks reported on Wednesday, citing the median estimate in a poll of 17 economists. Seven predicted the 50 basis point cut, one saw a reduction of 75 basis points, while two said rates would drop by 100 basis points. Seven predicted no change.

(This story was updated with strategist's comment in sixth paragraph, MPC member in ninth.) 

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