Turkey Ousts Central Bank Chief Who Drew Ire for Holding Rates


Sunday, July 07, 2019   /05:30AM / By Cagan Koc and Onur Ant of Bloomberg / Header Image Credit: Kerem Uzel/Bloomberg


  • Murat Cetinkaya’s four-year term was due to end in 2020
  • Decision may derail lira’s rally, which started two months ago


Turkish President Recep Tayyip Erdogan unexpectedly removed Murat Cetinkaya as central bank governor, after he was said to refuse an informal request to resign. The decision to oust him risks a market backlash just as policy makers were expected to start interest-rate cuts. 

Turkish Central Bank Quarterly Inflation Report

Murat CetinkayaSource: Bloomberg

Tension between Cetinkaya, whose four-year term was due to end in 2020, and the government worsened after a monetary authority meeting on June 12, when he kept borrowing costs unchanged, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to speak publicly about the matter. 

Deputy Governor Murat Uysal was named as a replacement, according to a presidential decree in Saturday’s Official Gazette. A spokesman for the Treasury and Finance Ministry didn’t answer calls. Text messages and phone calls to officials who work at the president’s office went unanswered.


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The shock ouster could reignite investors’ concern about the central bank’s independence, and may derail a rally in the lira that started at the beginning of May. The decision comes days after Turkey’s real rate soared to a world topping 8.3% as inflation slowed more than expected, giving policy makers room to start an easing cycle. The next policy decision is scheduled for July 25. 

“By abruptly dismissing Cetinkaya, Erdogan reminded everyone who is in charge of monetary policy,” said Piotr Matys, a London-based strategist at Rabobank. “The decision is set to undermine credibility of the central bank, which may start unwinding the emergency rate hike announced in September much faster than previously anticipated.” 

With the central bank on hold for months, authorities have instead relied on fiscal stimulus to ride out Turkey’s first recession in a decade. Still, industrial production fell for the first time this year in April, which raises the risk of a double-dip recession. The government wants to kick-start growth by lowering interest rates as inflation cools off.


What Our Economists Say... 

“If Erdogan’s aim was to get lower interest rates, then the decision to replace the governor could backfire. Now there’s an additional credibility constraint, with financial markets certain to scrutinize the motivation and magnitude of any easing. Investors will question whether it was really warranted by economic data, or if it was delivered under pressure from the government.” --Ziad Daoud, Mideast economist 

The president has chastised the central bank frequently for keeping borrowing costs elevated. Last month, he complained that while the U.S. Federal Reserve is moving closer to lowering interest rates, “the policy rate in my country is 24%, this is unacceptable.” 

His decision to remove Cetinkaya underscores the pressure placed on central bank governors worldwide. That includes Fed Chairman Jerome Powell, frequently a target of President Donald Trump, who as recently as Friday said the regulator is “our most difficult problem.” 

Agustin Carstens, the general manager of the Bank for International Settlements, said in late June that Turkey is an example of what happens when politicians meddle with monetary policy. Central banks need to “persevere” in following their goals and not be swayed by short-term political goals of decision makers in government, he said. 

Erdogan is using the powers granted to his office after last year’s general election, which transformed the political system into an executive presidency. The first batch of presidential decrees issued under the new rules last July included a change that allowed Erdogan to name central bank governors -- an appointment that previously required the support of the cabinet. 

Uysal, deputy governor since June 2016, said he would continue to implement monetary policy independently, in line with his mandate and authority. Uysal will hold a press conference in the coming days, according to a statement on the central bank’s website.


The Turkish Central Bank’s Mandate 

“The primary objective of the Central Bank is to achieve and maintain price stability. Price stability refers to an inflation rate low enough to be ignored in economic decisions. The Bank determines at its own discretion the monetary policy that it will implement and the instruments that it will use to achieve this objective. This means that the Bank has instrument independence.” 

Cetinkaya, appointed governor in April 2016, was criticized for acting too slowly to tighten monetary policy during a currency rout in August. He then showed resolve in the face of market turmoil, increasing the benchmark interest rate by 625 basis points in September and holding it ever since. 

Despite winning praise for delaying monetary easing, Cetinkaya also came under fire about the lack of transparency over recent volatility in the bank’s reserves, prompting concerns that the monetary authority was using its assets to prop up the lira before municipal elections earlier this year. 

Uysal’s appointment also drew criticism from former central bank officials, who said laws that guarantee the regulator’s independence also make it impossible for the executive branch to remove the governor unless he is involved in prohibited activities, such as holding shares in a commercial lender.


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