Erdogan fires Turkey's central banker, creating jitters over currency

Turkey's currency fell sharply on Monday, reawakening concerns of another bout of financial jitters in the country, after President Recep Tayyip Erdogan fired the central bank governor, reportedly over disagreements on interest rate cuts.

Murat Cetinkaya was replaced by Murat Uysal, the central bank's deputy governor, in a presidential decree published Saturday. No reason was given for the dismissal but media reports said Cetinkaya had resisted pressure from Erdogan to lower borrowing costs.

The move, which raises concerns over the independence of the bank from the government, is expected to lead to rate cuts in the coming weeks. The central bank holds its next monetary policy on July 25.

"The dismissal of Turkey's central bank governor over the weekend increases the chances of aggressive cuts in interest rates in the near-term," wrote Jason Tuvey, senior emerging markets economist at Capital Economics. "But it has also raised the risk of larger currency falls and is likely to make the country's inflation problem worse, pushing up long-term bond yields."

It also could lead to political changes. Former deputy prime minister Ali Babacan resigned from Erdogan's AK Party  on Monday citing "deep differences" over the party's direction.

Lira fragile because of Turkey's debtload

Lower interest rates tend to weaken a currency but boost economic growth and inflation. Inflation has been a problem for Turkey in recent years, and independent economists have said the country should have higher rates, though Erdogan has been pushing for cuts.

The Turkish lira dropped by three per cent in early trading on Monday before recovering some of its losses. It stood at 5.74 against the U.S. dollar, down some two per cent from Friday.

Turkey's currency nosedived last year over concerns about the country's high levels of foreign debt, Erdogan's economic policies and a diplomatic and trade dispute with the United States. At the time, the central bank raised interest rates sharply, from 17.75 per cent to the current 24 per cent to support the currency and fight inflation.

Erdogan has called for lower rates

Erdogan has frequently criticized the central bank for keeping rates high. The Hurriyet newspaper said the governor had rejected calls by the president to lower the benchmark interest rate.

Uysal, the new governor, said the central bank would continue to "independently implement monetary policy instruments" for price stability.

Cetinkaya's four-year term was due to end next year. His dismissal was made possible under new executive powers under a new presidential system that went into effect last summer. Such appointments previously required a cabinet decision.

Reuters is reporting he had been asked to resign, but refused.

There were concerns about the bank's independence and also about Turkey's economy.

"Removing the central bank's governor in this manner will deal a big blow to its institutional structure, capacity and independence," Ibrahim Turhan, a former deputy central bank governor, wrote on Twitter.

Some traders pointed to U.S. President Donald Trump's frequent criticism of the Federal Reserve for raising interest rates in the past two years, though the U.S. benchmark rate is in the 2.25 to 2.5 per cent range. 

"There was no indication that this [sacking] was on the cards, but if you look at the U.S., the situation is not too dissimilar now," said Pictet Asset Management portfolio manager Guido Chamorro,