Middle East

EXCLUSIVE Erdogan is cooling on his latest central bank chief, sources say

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Turkish President Tayyip Erdogan in Sochi, Russia September 29, 2021. Sputnik/Vladimir Smirnov/Pool via REUTERS

ANKARA, Oct 8 (Reuters) - Turkish President Tayyip Erdogan is losing confidence in central bank governor Sahap Kavcioglu, less than seven months after he sacked his predecessor, and the two have communicated little in recent weeks, three sources familiar with the matter said.

The sources, who requested anonymity due to the sensitivity of the matter, said Erdogan was frustrated that an interest rate cut was delayed until just last month. It was unclear what Erdogan might do if anything, they said.

Erdogan's communications director Fahrettin Altun said on Twitter that the Reuters report was "fake news", without elaborating. The presidential office did not respond to earlier requests for comment on whether Erdogan has confidence in the central bank governor.

The president has abruptly fired three bank governors in the last 2-1/2 years over policy disagreements, roiling the lira and badly harming the credibility and predictability of monetary policy. read more

Analysts said last month's surprise rate cut was further evidence of political interference given Erdogan, a self-described enemy of interest rates, had long sought stimulus despite high inflation. The lira hit record lows in response.

Erdogan has not publicly addressed the rate cut, and the bank has declined to comment on allegations of political interference in its monetary policy.

The leader of the opposition IYI Party, Meral Aksener, said on Wednesday that Erdogan would probably soon fire Kavcioglu since that fitted the president's historical pattern of "washing his hands" after bad policy decisions.

The sources, who are close to the presidency, said Erdogan was disappointed that Kavcioglu had been unable to lower inflation in recent months.

"The president's trust in the central bank governor is damaged," said one source with knowledge of the matter.

"What was expected of him was a swift rate cut. Instead, the same interest rate was kept for months," the person added. "There is a serious discomfort over this issue. Erdogan does not meet with Kavcioglu as often anymore."

The central bank did not comment when asked whether Kavcioglu still had the president's confidence.

The two other sources confirmed the discord and noted that there would be risks to possibly replacing a fourth central bank chief - including three in the last 12 months alone - given the financial market volatility.

Kavcioglu "does not have a healthy communication with the president anymore," said a second source. "My concern is whether the president's own policies will be criticised now rather than that of the central bank governor."

'EXPIRATION DATE'

The bank cut its key rate (TRINT=ECI) to 18% from 19% last month despite rising price pressure.

Headline inflation hit a 2-1/2 year high of 19.58% in September, while a core measure - which Kavcioglu has been stressing over the last month - was 16.98%.

Analysts say Erdogan's heavier hand on monetary policy has contributed to a more than 50% drop in the lira in the last three years, a period in which inflation was mostly double digits.

Both have eaten into Turks' earnings and hit the president's opinion polls ahead of elections no later than mid-2023.

Erdogan appointed Kavcioglu in March after ousting Naci Agbal, a policy hawk who had hiked rates to 19%. Erdogan ramped up pressure for easing in June when he said publicly that he spoke to Kavcioglu about the need for a rate cut after August.

The first source said that in the past months, Kavcioglu had briefed the president that inflation was expected to drop by August, followed quickly by rates, but he only provided "the best case scenario". In the end, inflation marched only higher.

Inflation has unexpectedly risen globally this year, driven by post-pandemic supply bottlenecks and rising commodity prices, and catching most central banks off guard.

Aksener, seen as a possible opposition presidential candidate, said Erdogan's interference with the central bank is a "monstrous system" that depreciated the lira and raised the country's external debt.

Kavcioglu's "expiration date is approaching (in) this system that grinds bureaucrats like grinding garbage," she told party members in parliament on Wednesday.

Additional reporting and writing by Jonathan Spicer; Editing by Toby Chopra

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