July 7, 2019 / 4:24 PM / a year ago

Breakingviews - Global central bank assault claims Turkish victim

Turkey's new central bank governor Murat Cetinkaya speaks during a brief ceremony at which he officially took over from outgoing governor Erdem Basci in Ankara, Turkey, April 19, 2016.

LONDON (Reuters Breakingviews) - Independent central bankers are under attack around the world. Turkey’s Murat Cetinkaya has become the latest casualty. President Tayyip Erdogan, who wants lower interest rates to boost growth, on Saturday fired the governor who had maintained some credibility by keeping benchmark borrowing costs on hold since September. His replacement, Murat Uysal, will find it even harder to give the president what he wants.

The Turkish economy is suffering after years of credit-led growth fuelled by loose monetary policy. It contracted 2.6% in the first quarter of 2019 after a 3% decline in the previous three months. Following a sharp fall in the lira last summer, Cetinkaya hiked the main interest rate to 24% and kept it there. The policy had some success. Inflation fell to its lowest level in a year in June, though consumer prices are still rising at close to 16%. Reeling from local election defeats in Ankara and Istanbul, Erdogan has demanded lower rates, defying mainstream economic theory by arguing that higher borrowing costs stoke inflation.

Expectations that the new central bank chief might be more willing to comply will put renewed pressure on the Turkish lira. Yet another currency crisis is the last thing Turkey needs. The catalyst for last year’s selloff was U.S. sanctions in response to the detention of U.S. pastor Andrew Brunson. Another round may be imminent. U.S. President Donald Trump’s administration has threatened to penalise Turkey for receiving Russian S-400 anti-aircraft weapons, expected in the coming days. Any institutions involved in transactions with Russia’s defence sector could be blacklisted. Turkey’s depleted foreign exchange reserves mean it has little capacity to defend the currency. Cutting interest rates would be even more disastrous.

Cetinkaya’s sacking is a blow to expectations that Erdogan might take steps to rebuild his credibility elsewhere. After a bruising defeat in the rerun of Istanbul’s municipal election on June 23, some hoped the former footballer would remove his son-in-law Berat Albayrak from the post of finance minister, where he has been both influential and ineffective. Saturday’s presidential decree suggests Erdogan is doubling down. That will undermine any residual faith in Turkey’s economy but also deepen fractures within the ruling AK Party. It will also make independent central bankers around the world feel less secure.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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