Is Governor Agbal’s ‘tight stance’ sustainable?

Turkey’s new Central Bank NACI AGBAL, governor, began his career as a financial inspector three decades ago. He hopes such devotion to the rules will see him - and the economy - through one of the trickiest turnaround jobs in emerging markets.

Turkish President Tayyip Erdogan appointed Agbal in early November as the lira touched a record low and double-digit inflation was rising even higher. He has since hiked interest rates to 17% from 10.25%, sending the lira rallying beyond all peers.

For Agbal, 53, a former finance minister who is close to Erdogan, emphasizing the need to finally get inflation down to an official 5% target is the obvious strategy, given it is a central banker’s raison d’etre.

But for foreign investors and Turks alike, disillusioned by what many have called economic mismanagement in recent years, it has come as an abrupt and pleasant surprise, according to a Reuters analysis. They also wonder how long it will last given Erdogan fired Agbal’s two predecessors after only brief stints, and the president continues to publicly criticize high rates and espouse the unorthodox view that they cause inflation.

Agbal’s answer, according to interviews with the man himself and several colleagues, is that this time will be different. His supporters say straight talk about Turkey’s economic challenges, early evidence that an orthodox monetary policy is working, and Agbal’s ties with Erdogan should allow the Central Bank to keep rates sufficiently high without political interference.

“Given the point we had reached, it is obvious that a strong monetary tightening must be implemented in order... to restore the disinflation process as soon as possible, and that this will continue for a long time,” Agbal said earlier this month.

“If you abandon a tight policy stance... at an early stage, past experiences show that inflation moves upward again,” he said on Feb. 5 in his first interview as governor.

A senior official who worked with Agbal at the finance ministry said “he does what he considers to be right” above all. “If a step is necessary that Erdogan will not like, he would go to the presidential palace and say: ‘Mr. President, this needs to be done’ and he would explain why,” the person said, requesting anonymity. The presidential palace did not respond to a request for comment on Central Bank independence. The government has previously said the Bank sets policy independently.

LITTLE ALTERNATIVE

Agbal started working up the ranks at the finance ministry in 1989. He later became vice chair of the inspections board, then headed the general directorate of revenues and later became undersecretary. He was finance minister from 2015-2017. Seen as a well-prepped technocrat working mostly behind the scenes, Agbal was also a former lawmaker in the ruling AK Party. But his success will hinge on whether Erdogan, slipping in some opinion polls, now privately acknowledges there is little alternative to high rates if he hopes to relieve public angst over soaring costs of living and lost jobs.

The Central Bank’s FX reserves are badly depleted and its reputation damaged after years of financial engineering and unorthodox moves analysts said were meant to boost economic growth rather than lower inflation, which was 15% last month. The test of Agbal’s sway over the government may come when inflation begins to dip later this year, analysts say.

“The only thing which matters is to what extent Erdogan will leave monetary policy experts to do their job and remain patient with high rates,” said Commerzbank analyst Tatha Ghose. Agbal’s comments “highlight conventional monetary policy thinking

Naci Agbal Central Bank Governor

“It is obvious that a strong monetary tightening must be implemented in order... to restore the disinflation process as soon as possible, and that this will continue for a long time.”

(and) display keen awareness of which topics the market needs more convincing on,” Ghose added.

The palace did not respond to a request for comment on the president’s views on higher interest rates. Erdogan said after Agbal’s first rate hike in November that such “bitter pills” were necessary. On Thursday, the Bank’s policymakers held rates steady at 17%, the highest in any advanced or developing economy.

SIMPLIFY

Agbal’s predecessor, Murat Uysal, had slashed rates from 24% before he was ousted in the Nov. 7 leadership overhaul. Before he left, Uysal formally lifted rates only once but he also used “backdoor” measures, including regulations and a late liquidity window, to hike average funding costs to more than 14% from 7.5% in July. The backdoor moves were understood by the market, if not the public, as the policy tightening long reviled by Erdogan.

Agbal’s headline-grabbing hikes to the key one-week repo rate, totaling 675 points, only tightened real funding costs by 225 to 275 points. Yet Agbal has moved to simplify things: he returned to funding the market at the main rate; re-wrote policy committee statements to stress a “permanent” inflation drop; and said this month the bank no longer sought foreign swap lines.

After two years of burning through FX reserves - which buffer a country against financial crisis - no one expects the Central Bank under Agbal to support state-bank interventions worth some $130 billion to support the lira. Since Agbal took the reins, the currency has soared 20%, by far the best in emerging markets. “There could be steps that are necessary but they will not be liked by politicians,” said a senior economic policymaker who also requested anonymity. “If it needs to be done he will do it. I think he received that authority.”