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The Rabobank Research Team raises questions on the Turkish central bank’s independence following the dismissal of Governor Cetinkaya by President Erdogan  on Saturday.

Key Quotes:

“By dismissing Cetinkaya, who restored some of CBRT’s credibility by raising interest rates decisively by 625bps in September and maintaining a tight monetary policy to support the lira and rein in inflation, President Erdogan reminded everyone who is in charge of monetary policy.

Newly appointed Governor Uysal, who served as deputy governor for three years, is likely to be far keener than his predecessor to easy monetary policy to support recovery from recession. He may opt for a large cut of a few hundred bps on July 25 to appease Erdogan.

However, the scale of a rate cut will not be determined by Uysal or Erdogan, but by foreign investors and their sentiment towards the lira.

An independent central bank with high credibility is one of the most important factors when investors assess the attractiveness of local assets. In the case of Turkey, the latest dramatic reshuffle at the CBRT could mark the end of its independence and an official shift towards unorthodox policies.

We, therefore, do not expect sustainable capital inflows into Turkey apart from hot money driven by demand for lira’s carry trade.”