Erdogan appoints Sahap Kavcioglu as Turkey central bank’s head

Turkey central bank

If Turkey’s biggest economic challenges are chronic inflation and a plunging lira, then Sahap Kavcioglu, its new central banker, has unorthodox ideas on how to tackle them.

Kavcioglu, a little-known professor of banking who wrote a book about interest-free finance, has penned columns arguing that high interest rates drive inflation. That theory is at odds with mainstream economics but it is in tune with Turkey’s president, Recep Tayyip Erdogan, who has called interest rates “the mother of all evil”.

“Mr Kavcioglu will strongly echo what has already been expressed by President Erdogan. This was why he was ap pointed,” said Ibrahim Turhan, a for mer deputy central bank governor, now an economics professor, who served with Kavcioglu in parliament when both were elected for Erdo gan’s ruling Justice and Development party in 2015.

Kavcioglu’s appointment is the latest act in a political drama over the best way to manage the economy. He rep la – ces Naci Agbal, a respected former fin – an ce minister brought in after his predecessor was fired as the lira plunged.

Agbal promised to keep monetary policy tight, helping the lira recover, but he was this weekend sacked by presidential decree after he lifted rates to 19 per cent on Thursday to tame inflation of almost 16 per cent. Even as Kavcioglu sought to reassure investors he would fight inflation and signalled he would not immediately undo Agbal’s rate rises, the lira has fallen 14 per cent.

The central bank shake-up comes at a challenging time for emerging markets, which are competing for investor interest with rising US Treasury yields. Turkey, whose currency lost a fifth of its value last year and faces short-term debt obligations of about $180bn, is seen as especially vulnerable.

When Kavcioglu said he would do whatever was needed to halt inflation, “it doesn’t necessarily mean generally accepted monetary policy, but that he will cut inflation by cutting rates”, said Turhan. “He will try to increase available borrowing facilities for corporates at a lower cost . . . because he thinks the impact will help to curb inflation.

Economists say the simplest way to soothe the currency and get doubledigit inflation under control would be to raise interest rates, thus keeping prices of imported goods in check.
The new central bank governor has a low profile in Turkey. The 53-year-old took up a teaching post last year at Istanbul’s Marmara University, where he had earned graduate degrees from its banking and insurance programme.

Before his single term as a lawmaker, he worked at commercial and state banks, including a decade at Halkbank, a state lender that has been indicted in US federal court on money-laundering, fraud and sanctions offences. Kavcioglu has not been implicated in the alleged scheme. Halkbank has denied wrongdoing ahead of a trial to begin this spring.

Clues as to Kavcioglu’s thinking can be found in his newspaper columns. He criticised rate rises totalling 875 basis points under Agbal. On February 9, he argued high rates merely attracted portfolio inflows when Turkey needed inv – estment in production. “It is always our country that loses from the policy of high interest and low exchange rates,” he wrote. “Increases in the interest rate paves the way for inflation.”

Kavcioglu also defended a policy att – ributed to Berat Albayrak, a former fin – ance minister and Erdogan’s son-in-law, of spending the bank’s foreign currency reserves to slow the slide in the lira last year, draining about $100bn. “If reser – ves aren’t used when needed, when will they be used?” he wrote on March 2.

Kavcioglu’s appointment is evidence Albayrak “is still pulling the strings”, said Wolfango Piccoli, co-president of Teneo Intelligence. Erdogan last month hit at opposition calls for a judicial probe into how the reserves were spent under Albayrak.

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