Turkey fires central bank chief as policy differences deepen amid economic malaise

Murat Cetinkaya (pictured), who had been serving as the governor since April 2016, was removed from the role and was replaced by his deputy Murat Uysal.
Murat Cetinkaya (pictured), who had been serving as the governor since April 2016, was removed from the role and was replaced by his deputy Murat Uysal.PHOTO: REUTERS

ANKARA (REUTERS) - Turkey on Saturday (July 6) fired its central bank governor as policy differences between the government and the bank deepened in the face of an economic slump, volatility in the lira currency and high inflation.

Murat Cetinkaya, who had been serving as the governor since April 2016, was removed from the role and was replaced by his deputy Murat Uysal, a presidential decree published on the official gazette showed.

No official reason was given for the sacking, but markets have speculated over recent weeks that Cetinkaya may be pushed out by the government because of his reluctance to cut rates.

The central bank has faced pressure in the past from President Tayyip Erdogan to lower interest rates to revive an economy which slipped into recession earlier this year.

The Turkish economy shrank sharply for the second straight quarter early this year as a punishing currency crisis, and soaring inflation and interest rates took a heavy toll on overall output.

"President Erdogan was unhappy about the interest rate and he expressed his discontent at every chance. The bank's decision in June to keep rates constant added to the problem with Cetinkaya," a senior government official said.

"Erdogan remains determined to improve the economy, and for that he made the decision to remove Cetinkaya," said the official, who spoke on condition of anonymity.

Two other government sources said that differences between the government and the governor over the conduct of monetary policy have deepened in the past few months.

"The difference of opinions between the governor and the ministers in charge of the economy has deepened in the recent period," said one of the sources.

Cetinkaya had hiked the benchmark interest rate by a total of 750 basis points last year to support the ailing lira, pushing it to 24 per cent by September where it has since been left unchanged.

Erdogan, whose son-in-law is the finance and treasury minister, repeatedly criticised the central bank for keeping rates high.

"The President and the finance minister demanded his resignation, but Cetinkaya reminded of the bank's independence and declined to resign," the other source said.

In a statement on Saturday, the central bank said it will continue to operate independently and that the new governor will focus on maintaining price stability as its key goal.

"In his first remarks, Murat Uysal, said that the communication channels would be used at the highest level in line with the price and financial stability goals," the bank said.

"He will hold a press conference within this frame in the coming days," the statement added.

QUESTIONS OVER INDEPENDENCE

Data earlier in the week showed Turkey's consumer inflation slowed to its lowest level in a year in June, mainly due to a high base effect from the prior year and a drop in food prices, potentially paving the way for the country's first interest rate cut since last year's currency crisis.

Annual inflation hit a 15-year high in October above 25 per cent, but later dipped and is currently running just over 15.5 per cent.

Analysts expect the central bank could ease monetary policy at a July 25 meeting if the lira is not hit this month by threatened US sanctions over Turkey's purchase of a Russian missile defence system.

The lira is down 10 per cent this year after having plummeted 30 per cent last year during the currency crisis.

While the central bank emphasised its independence, a senior banker who did not want to be named due to the sensitivity of the issue, said the sacking raised questions regarding the bank's authority.

"The removal of the governor from duty creates doubt regarding the job security of the head banker and the bank's independence. We will be watching the bank closely in the coming period," the Istanbul-based banker said.

The main opposition party also pointed to concerns that the move could undermine the bank's credibility.

"Those who removed the central bank governor overnight have lost the right to demand confidence in the country's economy. The central bank is a captive being kept in the palace," said the main opposition party spokesman Faik Oztrak, referring to Erdogan's office.