ISTANBUL (Reuters) – President Tayyip Erdogan’s decision to oust Turkey’s central bank chief entrenches his unorthodox view that high rates cause inflation and came shockingly early in Naci Agbal’s stint as governor, a top Fitch Ratings official told Reuters.
Douglas Winslow, director at Fitch’s sovereign team who covers Turkey, said in an email the March 20 decision to fire Agbal after less than five months raises the risk of “looser and less orthodox” monetary policy in the months ahead.
Fitch has a stable BB- “junk” rating on Turkey and said in a report last week the change at the top of the central bank – Sahap Kavcioglu, a critic of Agbal’s tight policy, was named governor – raises Turkey’s inflation and external financing risks.
The other two big ratings agencies issued similar warnings after Turkey got its fourth bank chief in two years. Investors, predicting pending interest rate cuts, abandoned Turkish bonds and stocks and sent the lira down 10% last week.
“The clearest implication is it reinforces President Erdogan’s opposition to high interest rates in the context of his unorthodox views on their link with inflation – further damaging monetary policy credibility,” Winslow said.
“We didn’t expect such a move so early in (Agbal’s) term because of his previous relationship with President Erdogan, and the fact that since taking office in November there had been a partial lira recovery and stabilisation of FX reserves.”
Both Agbal and Kavcioglu are from Erdogan’s ruling AK Party.
In newspaper columns, Kavcioglu has criticised Agbal’s aggressive tightening which brought the policy rate up to 19%, including a hike this month. He has also said high rates cause inflation – echoing Erdogan’s long-held view.
Winslow said he expects tariffs and other measures to dampen imports, given the depreciation. A spike in rates last week to 1,400% in the overnight lira swap market, he said, shows rising costs and uncertainty for investors.
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