Turkey's President at logger head with PM over new Central Bank Chief

Turkish President Recep Tayyip Erdogan is at loggerheads with his premier over who should be the next central bank governor as the Turkish president pushes for a candidate amenable to cutting rates, according to people familiar with the matter.

Less than a month before the term of central bank Governor Erdem Basci expires, Prime Minister Ahmet Davutoglu and his deputy, Mehmet Simsek, want a governor who can win investor confidence with orthodox monetary policy. Erdogan and his allies are seeking someone who shares their view that Turkey needs lower borrowing costs to curb inflation, fuel investment and boost growth, the people said, speaking on condition of anonymity to discuss private debates. The two leaders must each sign off on a candidate.

The stalemate is part of a bigger power play between Turkey's top two leaders. Erdogan, who served as prime minister for 12 years until 2014, has transformed the typically ceremonial role of the president to a new center of power. Davutoglu, his handpicked successor, is seeking to portray an image of an independent policy maker. The emerging division is being increasingly felt among high-level decision makers, the people said. Many of them said the current split is unsustainable. Erdogan, who's kicking off his campaign to centralize power in the presidency through a constitutional change, has criticized the inefficiencies of what he calls a "two-headed system," with powers now uncertainly divided between the premiership and the presidency.

Davutoglu has yet to submit a candidate for the central banker job, one of the people said. He plans to meet Erdogan half-way, choosing someone that the president won't view as a staunch supporter of orthodox economic policies, the person said. That's likely to leave Turkey with a candidate that neither side is truly happy with, he said.

Barring the emergence of an outside candidate, Davutoglu and Simsek may propose Murat Cetinkaya or Ahmet Faruk Aysan, two members of the bank's rate-setting committee, one of them said. Both were appointed to their current positions while Erdogan was prime minister. "We generally see that disagreements between the government and Erdogan don't last very long and often end with a solution where Erdogan's decisions outweigh the others," said Inan Demir, chief economist at Finansbank AS in Istanbul. "With appointment of the new governor, pressure to lower rates without conditions that merit such a cut may emerge."

Spokesmen for the president and prime minister didn't immediately respond to requests for comment. This story is based on interviews with senior officials close to both camps, including people involved in deliberations over the central bank governor, over a period of three weeks. Turkey's reliance on foreign-currency inflows to plug its current-account gap makes the direction of monetary policy crucial for investors.