President Erdogan – always good for negative surprises

In a completely unexpected move, Turkish President Erdogan has discharged Murat Cetinkaya from the office of governor of the central bank. His deputy Murat Uysal is now expected to assume the position in the future. The background to the decision is the dispute about the adequate orientation of the central bank’s monetary policy, which Erdogan views as being much too restrictive. This opinion is based on the president’s confused economic view that high key interest rates lead to high inflation. According to media reports, the president is said to have clarified that he will not accept any other opinion from either the ranks of the government or of the central bank. Erdogan appears to have very successfully suppressed the fact that Cetinkaya helped to significantly ease the situation with a marked increase in key interest rates to 24% in September, thus stabilising the lira with the effect that price pressure in the country has also eased since the end of 2018.

In fact, market participants could have gained the impression in recent months that the central bank really was enjoying a certain degree of independence. This now appears to be a thing of the past again and the step taken by President Erdogan has made it clear who has the last word on monetary policy. Uysal’s first declarations are therefore questionable. According to a statement on the central bank’s homepage, he is in favour of an independent central bank policy. In line with this, his focus will remain on the primary objective of price stability. A press conference is expected to be scheduled in the next few days. It should be particularly interesting to see whether and to what extent Uysal will take over the president’s economic hypotheses. Cetinkaya’s successor is no doubt also aware of the destiny that awaits those who do not comply.

Given the open attack on central bank independence that is already not particularly pronounced, market reaction appears to be extremely restrained. The majority of market players seem to believe that Uysal will follow his predecessor’s path – despite all the political adversities. One fact supporting Uysal is that moderate key rate cuts actually seem appropriate in the near future. Nonetheless, the new man in the job is likely to face a balancing act. After all, he cannot be accused of operating at the behest of Erdogan. If Uysal fails to do so, we can expect further significant deprecation of the lira – with the known negative effects on inflation and the country’s already heavily troubled economy.

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