July 9, 2018 / 2:37 PM / 4 months ago

UPDATE 2-Turkey removes clause on five-year term for central bank governor

(Updates with analyst comments, market reaction)

By Humeyra Pamuk and Ali Kucukgocmen

ISTANBUL, July 9 (Reuters) - Turkey on Monday removed a law that stipulates a five-year term for the head of the central bank and scrapped a requirement that deputy governors have a decade of experience, deepening worries about the bank’s independence under a new presidential system.

The lira currency, which has been battered this year by concerns about President Tayyip Erdogan’s drive for greater control over monetary policy, declined after the changes were published.

Shortly before Erdogan took oath for a new term in office - which marks the start of a shift to an executive presidency - the government in its Official Gazette removed a clause that had stated the central bank governor was appointed by cabinet decision for five years, and could be re-appointed.

Erdogan is a self-described “enemy of interest rates” and investors are concerned that his push for cheaper borrowing costs will mean he will look to take greater control of monetary policy under the new system.

The five-year term served as a sort of “shield” for the central bank, helping to ensure its independence from politicians, said Ugur Gurses, a former central banker.

“When you scrap the five-year term you remove this shield,” he said. “I am hoping that this has been done somewhat erroneously.”

The decree did not state an alternative term length or re-appointment process for the central bank governor, or what new requirements for deputy governors would be.

But Cemil Ertem, a senior advisor to Erdogan, said a new decree on the governor’s term would be published later on Monday, adding that governors would still be appointed for a five-year term.

The currency declined as far as 4.6158 but pared losses after Ertem’s comments. It stood at 4.5655 against the dollar at 1508 GMT, strengthening slightly from Friday’s close of 4.5745. It has lost nearly 17 percent so far this year.

“WAKE-UP CALL”

Erdogan said in May he would take further control of the central bank after June 24 elections, which sent the lira tumbling to a record low against the dollar, and forced the central bank to aggressively raise rates.

It has increased borrowing costs by a total of five percentage points since late April, helping to restore investor confidence.

“There was the sense in the market that there is the principle of the reality, which means the central bank will be allowed to hike interest rates when necessary,” said Sebastien Barbe, head of emerging market research and strategy at Credit Agricole.

“Now, because of the decree, I think the market is maybe coming back a little bit to a wake-up call and the market is a little bit worried again.”

Investors are also keen for details on Erdogan’s new economy team, which is expected to be announced later on Monday.

“If we see market-friendly names being appointed (to the cabinet) we might see an even more positive response for the lira and the opposite is true as well,” said Inan Demir, senior emerging markets economist at Nomura International.

Erdogan has said he would appoint ministers from outside parliament, as well as people not from his AK Party. Investors are keen to see Mehmet Simsek, currently deputy prime minister, continue at the helm of the economy.

In a speech on Saturday, Erdogan said he would tackle high interest rates, inflation and a wide current account deficit. He also promised to take Turkey “much further” by solving the economy’s structural problems.

The main index BIST100 closed up 0.53 percent at 99,252.84 points. (Additional reporting by Tuvan Gumrukcu and Ece Toksabay; Editing by Richard Balmforth)

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