Abu Dhabi, UAEMonday 21 October 2019

With President Erdogan watching Turkey's central bank is in a fix on rate cuts

Murat Uysal has taken over as the governor of the central bank after Murat Cetinkaya's dismissal

Surprise change of Turkey's central bank governor has also hit Lira as trader fret about rate cuts. Bloomberg
Surprise change of Turkey's central bank governor has also hit Lira as trader fret about rate cuts. Bloomberg

It was just around 6am on Saturday when Murat Uysal put out his first statement as Turkey’s new central bank governor.

His pledge to “independently implement monetary policy instruments” for the sake of price stability may seem standard, but practicing what he preaches will be a test for Mr Uysal, 47, who took office after President Recep Tayyip Erdogan’s stunning dismissal of Murat Cetinkaya.

A deputy governor since 2016, Mr Uysal faces one of the toughest acts the world of central banking has to offer. Cut interest rates too little and risk Mr Erdogan’s fury, cut too much and watch markets suffer. The sudden clearing of the decks blindsided some investors and has already put Turkish assets under pressure.

In ordinary times, Mr Uysal would pass for a reasonable candidate to take charge of monetary policy in the Middle East’s largest economy with a debt market bigger than Russia’s.

Armed with degrees in economics and banking and a fluent speaker of three languages, he boasts years of experience as an executive at one of Turkey’s top lenders.

What qualified him to take over from Mr Cetinkaya, however, may have little to do with his resume. A person who has worked with Mr Uysal said he was close to the president and described him as sincere and easy to work with. As a member of the Monetary Policy Committee, he is staked out views that are more dovish and focused on credit growth than some other rate-setters, said the person.

If so, Mr Uysal’s stance would align him closer to Mr Erdogan, who has signalled he is running out of patience with a central bank that has held interest rates since a dramatic increase of 625 basis points last September. As inflation slows and the economy still runs the risk of a double-dip recession, Mr Uysal will get his first chance to relax policy at a meeting less than three weeks from now.

“With his experience as deputy governor and before then as head of treasury of a large bank, there’s no question the new governor is well prepared,” said Inan Demir, an economist at Nomura International in London. “However, the ease with which the former governor was removed sets a dangerous precedent, which is bound to have an impact on monetary policy conduct going forward.”

A graduate of a prestigious Istanbul high school famously known as “Turkey’s window to the West,” Mr Uysal’s background in finance sets him apart form Mr Cetinkaya, whose academic focus was on sociology and international relations. A thesis he wrote on inflation-targeting was criticised for alleged plagiarism on Monday, with the central bank declining to comment on the accusations.

Working as a deputy chief executive at state-run Halkbank, Mr Uysal had an up-close view of a corruption probe that briefly engulfed the lender and implicated cabinet ministers and their families.

Mr Uysal remained an “honest, hardworking and sincere guy” throughout the difficult times, said Isik Okte, a TEB strategist who worked with him while serving as a research director at Halkbank’s brokerage subsidiary.

“He understands financial markets well, he is open to communication with everybody and when he doesn’t know something he says so and makes an effort to learn,” he said. “These qualities may not necessarily make him a great central banker, but they surely make him a great manager. One of the best I have seen in my 25-year career in the finance sector.”

Boxed in by nervous markets and an impatient Mr Erdogan, Mr Uysal’s room for error is minimal. So far he’s vowed that the central bank will focus “on achieving and maintaining its primary objective of price stability”.

The question is whether Mr Erdogan is on board. During a closed meeting hours after ousting Mr Cetinkaya, the Turkish president told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher interest rates cause inflation, according to an official who was present. He also threatened consequences for anyone who defies the government’s economic policies, the official said.

Mr Erdogan, who once called himself an “enemy of interest rates,” has long said that he intended to tighten his grip on the economy and take more responsibility for monetary policy. To dismiss Mr Cetinkaya, he used the powers granted to his office after last year’s general election, which transformed the political system into an executive presidency.

If that is the case, Mr Uysal may be little more than a figurehead.

“With the sacking of Cetinkaya, President Erdogan has made clear that he has the last say in terms of monetary policy,” said Ulrich Leuchtmann, head of currency and commodity research at Commerzbank. “In this situation, even the most hawkish central banker of the world would have to bend, as the alternative would be to be sacked himself.”

Updated: July 9, 2019 11:36 AM

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