Duvar English - Reuters
Politics drove Turkish President Recep Tayyip Erdoğan's sacking of Central Bank chief Naci Ağbal after just four months in office, six people with knowledge of the situation told Reuters, with one describing a big interest rate hike two days earlier as simply "the last straw."
Ağbal's shock dismissal by Erdoğan, whose dislike of orthodox monetary policy is well-known, has pushed Turkey to the cusp of another currency crisis.
The decision surprised the governor himself, who according to two of the sources worked late at the bank on Friday March 19, hours before he was fired.
Senior government and Central Bank officials told Reuters Ağbal's rapid rise and fall reflected both his divergent vision for the economy and the perceived threat he posed to Erdoğan's son-in-law and former finance minister Berat Albayrak.
The Presidential Palace and the Central Bank declined to comment on the background to Ağbal's departure, as did representatives for Ağbal and Albayrak.
Three of the sources, who spoke on condition of anonymity, said Erdoğan was irritated in February by Ağbal's decision to review a costly policy undertaken during Albayrak's tenure of selling dollars -- roughly $130 billion since 2019 -- to defend the lira.
"Was there discomfort regarding this? Yes, there was. It was one of the influential issues in the presidential palace," the first source said.
Another person with direct knowledge of the review of FX sales said it could have turned into an outside investigation had Ağbal remained at the bank.
The claim was previously voiced by Democracy and Progress Party (DEVA) leader Ali Babacan, Turkey's former economy czar.
Word of the potentially sensitive review reached Erdoğan around the time he was rallying public support for Albayrak, fuelling speculation that his son-in-law was seeking a return to government after having quit in November, a day after Ağbal's appointment.
Albayrak and Ağbal are seen as representing two key factions of the ruling Justice and Development Party (AKP), which has ruled Turkey for two decades under what analysts describe as an increasingly authoritative and impulsive Erdoğan.
Promised to rebuild reserves
One of the sources said "the first shadow fell over" Ağbal on Feb. 24 when the bank made an apparently routine adjustment to reserve requirements that was interpreted by Erdoğan as a veiled interest rate hike.
The same day, the president told AKP members that FX reserves at the Central Bank had been reduced on Albayrak's watch to help the economy through the pandemic last year.
The $130 billion in sales by state banks were backed by Central Bank swaps, and they cut net FX reserves -- a country's buffer against financial crisis -- by about 75%.
Even as several top government and party officials lined up to publicly defend Albayrak from opposition criticism, Ağbal -- himself a former finance minister -- did not comment on his legacy and promised to rebuild the reserves.
"Ağbal was not happy that his job was being overshadowed by the previous policy of spending FX reserves," said a person close to the bank.
During Ağbal's short tenure, the lira first rallied 24% from a record low before beginning to slide when Erdoğan began defending Albayrak's legacy. It jumped nearly 4% after Ağbal hiked rates by 2 percentage points on March 18 before plunging 13% when he was fired two days later, returning nearly to where it began.
Cemil Ertem, Erdoğan's chief economy advisor, said Turkey will not adopt capital controls to support the lira, adding "the free market economy will be applied without compromise" despite the leadership overhaul.
Ağbal had won praise from foreign investors who found his approach to monetary policy reassuring after years of worry about the Central Bank's credibility -- now in tatters again after he became the third governor to be ousted in two years.
Erdoğan, who also abruptly fired the last two governors in part over policy differences, had promised when Ağbal was appointed to kick-start economic reforms.
'No negative feedback'
As Ağbal's successor, Erdoğan named Şahap Kavcıoğlu, a former banker and AKP lawmaker who pledged to keep policy tight but has previously espoused the unorthodox view shared by the president that high interest rates cause inflation.
Some investors now say they will avoid Turkey as long as Erdoğan is the leader. Ratings agencies have warned of downgrades while stocks have suffered their worst selloff since the 2008 global financial crisis.
"Erdoğan, and the Turkish conservative circle, feel that a tight monetary policy goes counter to their interests," said Patrick Esteruelas, research head at Emso Asset Management in New York.
In March, with inflation above 15% and the lira sliding amid a global bond market rout, markets were betting on a 1 percentage point rate rise to 18%.
Faced with what analysts called a credibility test, Ağbal -- who had already hiked rates from 10.25% -- decided to go further, to 19%, to reinforce his inflation-fighting rhetoric.
Before that, as usual, he informed Erdoğan's office of the policy decision. Two of the sources with knowledge of the bank's operations said there was no response.
"There was no negative feedback," said the second source. "The dismissal seriously really surprised everybody."
The first source said the Palace did not officially inform Ağbal he was being dismissed until very late on Friday, March 19. Just after midnight, Erdoğan's order was published.
Minutes after financial markets reopened on March 22, the lira had lost 15% of its value.
Since then, Erdoğan has also dismissed a bank deputy governor, and a party leader has said he plans a cabinet shuffle in which analysts say Albayrak could resurface. The government has not commented on a possible return of the minister.
Soner Çağaptay, a director at the Washington Institute for Near East Policy, said "palace politics" and rivalries played a role in Erdoğan's recent decisions, and Ağbal's sacking could pave the way to a comeback by Albayrak.
"Erdoğan's decisions are increasingly undermined by clique politics," he said.