Being a central banker chief in the Central Republic of Turkey is not easy these days, especially if you hold views contradictory to those of President Recep Tayyip Erdogan. For the third time in a year, the head of the Monetary Policy Committee (MPC) was given his walking papers, one day after the institution raised its benchmark interest rate to curb the growing inflation threat. Considering Erdogan’s economic positions, it was almost a certainty that Naci Agbal, who was appointed to the post in November, would be canned. And, unsurprisingly, the financial markets did not express ebullience over the political developments.
Naci Agbal’s Turkey Is Cooked
The central bank held a policy meeting on March 18, at which officials agreed to increase the benchmark seven-week repo rate by 200 basis points to 19%, marking the first rate hike since December. Economists had anticipated as much as 100 basis points after policymakers disappointed investors in February without additional tightening. Either way, equities and forex traders were pleased that Ankara was embracing a more orthodox monetary policy view.
Inflation had been spiraling out of control, topping a 20-month high of 15% in January. Turkey had been submerged in the abyss following a year of reckless actions, such as slashing interest rates and imbibing foreign exchange reserves to prop up the currency. A panic-stricken Erdogan overhauled his government late last year, and that turned out to be a successful endeavor for his fragile regime. Within just three months, the Eurasian nation was engulfed in hope: Agbal had ushered in the stabilization of the lira, global financial markets’ confidence had been renewed, and international agencies modified their forecasts upward for the country’s prospects.
However, as Liberty Nation noted, a specific remark within the organization’s statement may have prompted Erdogan to give Agbal the pink slip: “… to implement a front-loaded and strong additional monetary tightening.” The president defies economic orthodoxy, so this was the deathblow for the head of the central bank.
In a decree published in the Official Gazette in the middle of the night, it was announced that Sahap Kavcioglu, a university professor and pro-government columnist, would be his replacement. He has championed low rates, lamenting on the central bank’s “turning a deaf ear” to the population of 83 million people by increasing the benchmark.
“The central bank shouldn’t insist on high interest rates,” he opined in a Feb. 9 column. “When interest rates in the world are close to zero, raising interest rates here won’t solve our economic problems. To the contrary, it’ll deepen them in the period ahead.”
Kavcioglu has defended Erdogan’s unorthodox view that hiking rates “indirectly opens the way to increasing inflation.” Basic economics – and history – show that the opposite is true: Normalizing interest rates controls rising inflation.
Should investors abandon ship? Erdogan’s midnight announcement was proof that he appreciated the market’s adverse reaction to the news. That said, Finance Minister Lutfi Elvan attempted to cushion the blow, assuring everyone that Ankara would maintain free-market reforms and keep up with a more liberal foreign-exchange regime. But traders disagreed. The main stock exchange tumbled 9%, and the lira crashed as much as 15% against the U.S. dollar and the euro.
Should the West Hire Naci Agbal?
During the coronavirus-induced economic collapse, the world instituted a great neo-Keynesian experiment: taking an ax to interest rates, printing trillions of dollars in a short period, and employing unconventional and extraordinary measures. Leaders looked only to the following day on the calendar, abandoning the future's health and prosperity. But as fiscal and monetary policymakers continue to embrace easing out of desperation, two nations have started tightening. Russia’s Elvira Nabiullina recently lifted rates for the first time in two years, while Ankara has been on a campaign of normalization. With investors in the financial colosseum’s peanut gallery confident in the abilities and efforts of Nabiullina and Agbal, is it perhaps time that western countries poach these two individuals to head public policy?
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Read more from Andrew Moran.
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