Breakingviews – A Turkish victim victim of an aggression in the world

LONDON (Reuters Breakingviews) – Independent central bankers are being attacked around the world. Turkey Murat Cetinkaya has become the latest victim. President Tayyip Erdogan, who wants interest rates to fall to boost growth, Saturday sacked the governor, who had maintained some credibility by maintaining benchmark borrowing costs outstanding since September. His replacement, Murat Uysal, will have even more trouble giving the president what he wants.

The Turkish economy suffers after years of credit-driven growth fueled by a loose monetary policy. It contracted 2.6% in the first quarter of 2019, after falling 3% in the previous three months. After a sharp drop in the lira last summer, Cetinkaya raised the key rate to 24% and maintained it. The policy has had some success. Inflation fell to its lowest level in a year in June, although consumer prices continue to rise by almost 16%. Following defeats in local elections in Ankara and Istanbul, Erdogan called for lower rates, defying traditional economic theory by saying that rising borrowing costs fueled inflation.

The hope that the new head of the central bank is more willing to comply will exert further pressure on the Turkish lira. Another currency crisis is the last thing Turkey needs. US sanctions in response to the detention of US pastor Andrew Brunson were the catalyst for last year's sale. Another round may be imminent. The administration of US President Donald Trump has threatened to punish Turkey for receiving Russian anti-aircraft weapons S-400, expected in the coming days. All institutions involved in transactions with the Russian defense sector could be blacklisted. The depletion of Turkey's foreign exchange reserves gives it a weak defense of the currency. Reducing interest rates would be even more disastrous.

The dismissal of Cetinkaya is a blow to hope that Erdogan can take steps to rebuild his credibility elsewhere. After a deadly defeat in the resumption of the municipal elections in Istanbul on June 23, some hoped that the former footballer would remove his son Berat Albayrak from the post of finance minister, where he would have been both influential and effective. Saturday's presidential decree suggests that Erdogan doubles his manpower. This would undermine any residual confidence in the Turkish economy but would also deepen the divide within the ruling AK Party. Independent central bankers around the world will also feel less secure.