President Recep Tayyip Erdoğan’s abrupt decision to sack Turkey’s central bank governor Murat Çetinkaya came after months in which they had not met and was precipitated when Çetinkaya rebuffed requests in June for a 300 basis point rate cut, Reuters reported, citing three sources.
Erdoğan has made no secret of his hostility to high interest rates which, contrary to orthodox economic thinking, he says drive up inflation. He has said Çetinkaya was ousted because the former governor had not followed instructions.
Accounts from three sources with knowledge of the matter — speaking just days before the central bank’s next rate decision — offer fresh details of a fraught relationship that finally ended when Çetinkaya’s sacking was announced shortly before dawn on a Saturday morning two weeks ago.
The governor had overseen interest rate hikes of 11.25 percentage points last year as Turkey battled a currency crisis and rising inflation. These included an eye-watering 625 basis point rise in the benchmark rate to 24 percent in September.
That stemmed the meltdown in Turkey’s lira and helped bring inflation down from a 15-year high of 25 percent in October. But it came at a cost as the economy tipped into recession.
Two hours before the September rate move was announced, Erdoğan bitterly criticized the central bank for taking “wrong steps” to address inflation.
Erdoğan had already voiced concern about previous rate rises and from the middle of last year appeared to end direct contact with Çetinkaya, the sources said.
“As far as I know, there has been no contact between Erdoğan and Çetinkaya for about a year,” said the first source familiar with the issue.
Other measures also caused friction between Treasury and Finance Minister Berat Albayrak and Çetinkaya, the sources said. They included moves to support government finances by transferring central bank dividends to the treasury ahead of schedule, caps on the interest rates that state banks paid to depositors and amendments to banks’ required reserves.
“The differences in opinion resulted in increased tension between the minister and the governor, and a breakdown in communication,” said a second source with knowledge of the contacts between the ministry and the bank.
Çetinkaya has made no public comment since his July 6 ouster. Treasury officials said the comments by the three sources were incorrect.
An official at the Turkish presidency said, “The president has explained his view in public, there is nothing more to say.”
The issue came to a head in the buildup to the central bank’s June 12 interest rate setting meeting.
“I know there was a demand to the central bank for a rate cut of 300 basis points in June, and they were asked to continue cutting in July,” said the first source. A third source confirmed the 300 basis point request.
When the monetary policy committee met, however, it decided by four votes to two to keep rates unchanged, the third source said.
“Many factors including the state of the economy, data — especially inflation — and the local election were effective in this decision being taken,” he said, referring to the re-run of an Istanbul mayoral election that the opposition won on June 23.
“It was this incident that brought the crisis to a climax,” the second source said. “When no rate cut decision was made, they decided not to continue with Çetinkaya.”
The source said both Erdoğan and Albayrak had sought Çetinkaya’s resignation after the June decision. When he stood his ground, citing the central bank’s independence, “the decision for his removal was made.”
Four days after Çetinkaya’s dismissal, Erdoğan publicly set out why he was removed. “We believed that the person who was not conforming to instructions given on this subject of monetary policy, this mother of all evil called interest rates, needed to be changed,” the president said in a speech.