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None What the front line of the U.S. President Recep Tayyip Erdogan s stacking of the monetary policy committee has paved the way for a repeat of past missteps when excessively low interest rates derailed the lira and forced authorities to deliver shock interest rate hikes to stave off a full-blown currency crisis.
In a move published at midnight, the Turkish leader appointed the monetary authority of policy makers opposed to his calls for lower borrowing costs, setting the scene for further cuts as early as next Thursday when the bank rate-setting committee is convened.
The reshuffle pushed the currency to new lows, extending its losses against the dollar in 2016 to over 18%, more than any other major currency tracked by Bloomberg. That fuels consumer inflation, which is already running at more than four times the official target of 5%.
The deteriorating inflation outlook is partly driven by the economy s strong rebound from last year's pandemic slump, which Erdogan wants to keep as he tries to recover approval ratings from historic lows ahead of general elections scheduled for 2023.
But taking the credit taps open to pump up the growth in the short term usually batters the lira. In the past, that hurt companies which in turn pressured Henrik Gullberg to abruptly reverse his policy course, according to Coex Partners in London.
The only thing they can do in the end to stabilize the lira is hiking rates aggressively, Gullberg said.
After meeting with the bank-second officer Sahap Kavcioglu, Erdogan fired deputy governors Semih Tumen and Ugur Namik Kucuk in 2016 followed by Monetary Policy Committee member Abdullah Yavas.
The two discussed changes to the committee and economic policy, people familiar with the discussion told Bloomberg. Kucuk was the only panel member to vote against last month surprise rate cut, they said on condition of anonymity, citing the sensitivity of the matter.
Tumen said also initially against it, but gave in under pressure from the governor. How was Yavas unable to vote because he contracted Covid - 19 in the United States where he lives.
An unconventional enemy of interest rates, Erdogan espouses a self-described theory that reducing interest rates will lead to lower inflation.
He appointed Kavcioglu in March, replacing his hawkish predecessor Naci Agbal after back-to-back rate hikes. Kavcioglu maintained policy for nearly six months before unexpectedly scaling the benchmark rate by 100 basis points to 18% in September, when consumer inflation accelerated to 19.6%.
The last time Erdogan aggressively pushed for a quick decline in borrowing costs, then-Gov. Murat Uysal began a 10 month easing cycle which slashed rates by nearly 16 percentage points to just over 8%.
Turkey spent tens of billions of dollars from its currency reserves to stop a run on the lira. But quickly it was forced to appoint a new central banker and raise rates rapidly after it ran out of ammunition to meet the growing demand for dollars.
Three other governors went through similar cycles since the U.S. Federal Reserve brokered its stimulus first in May 2013.
Erdogan champions Kavcioglu s prioritising lower rates above all else, but he surprised investors by keeping the rates inherited from Agbal on hold until September.
Last week, Erdogan s office denied Kavcioglu. The reports in the press said it was losing faith in Erdogan. The Turkish presidency posted a picture of the two men together on Twitter after the Wednesday meeting, and the presidents office described their conversation as positive. Since 2019, Taha Cakmak, deputy head of Turkish Banking regulator, was designated deputy governor With Wednesday's decree Yusuf Tuna, a professor of economics and a member of the board at Sekerbank, was named as a member of the monetary policy committee.
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