As Asian markets opened on Monday, the Turkish Lira lost 3% against the dollar, with traders reacting to a surprise move by the President of Turkey on Saturday to fire the Governor of the Bank of Turkey, Murat Cetinkaya.
Firing the Governor of the Bank of Turkey underscores a lack of tolerance for independent monetary policy, as Cetinkaya refused to swiftly comply with the demand of President Recep Tayyip Erdogan to lower interest rates.
Cetinkaya was a close political ally of Berat Albayrak, the Ministry of the Economy and President Erdogan’s son-in-law and drew criticism last year for failing to raise interest rates fast enough to hold back galloping inflation. Inflation reached 24% in August 2018, peaking at 25% in October. However, it was only in September that the Central Bank of Turkey reacted by raising interest rates to 24%.
The orthodox policy did tame inflation. By June 2019, inflation dropped to 15,7%, down from 18.7% in May. At the same time, Turkey’s current account deficit is in check.
Still, President Erdogan insists high-interest rates are hurting the Turkish economy and moved to fire Cetinkaya almost a year before his first four-year term was concluded. The former Governor of the Central Bank of Turkey, Durmus Yilmaz, questioned the legality of Centikaya’s sacking.
The new Governor of the Bank of Turkey is Murat Uysal, who is expected to comply with the President’s demands.
The challenge to the independence of the Turkish Central Bank takes place in a sensitive political context, just as Turkey prepares to take delivery of a Russian S-400 air defence system. Washington has warned that if Turkey goes ahead with the order, the US could impose economic sanctions.
The combination of political volatility with a lack of confidence in monetary policy could renew Turkey’s currency crisis. Over the last year, the Turkish Lira has lost 30% of its value against the US dollar.