Mixed denomination of Turkish lira banknotes. Turkey’s reliance on foreign currency inflows to plug its current-account gap makes the direction of monetary policy crucial for investors. Image Credit: Bloomberg

Ankara: President Recep Tayyip Erdogan is at loggerheads with his premier over who should be the next central bank governor as the Turkish president pushes for a candidate amenable to cutting rates, according to people familiar with the matter.

Less than a month before the term of central bank Governor Erdem Basci expires, Prime Minister Ahmet Davutoglu and his deputy, Mehmet Simsek, want a governor who can win investor confidence with orthodox monetary policy.

Erdogan and his allies are seeking someone who shares their view that Turkey needs lower borrowing costs to curb inflation, fuel investment and boost growth, the people said, speaking on condition of anonymity to discuss private debates. The two leaders must each sign off on a candidate.

The stalemate is part of a bigger power play between Turkey’s top two leaders. Erdogan, who served as prime minister for 12 years until 2014, has transformed the typically ceremonial role of the president to a new Centre of power. Davutoglu, his hand-picked successor, is seeking to portray an image of an independent policymaker.

The emerging division is being increasingly felt among high-level decision makers, the people said. Many of them said the current split is unsustainable. Erdogan, who’s kicking off his campaign to centralise power in the presidency through a constitutional change, has criticised the inefficiencies of what he calls a “two-headed system”, with powers now uncertainly divided between the premiership and the presidency.

Davutoglu has yet to submit a candidate for the central banker job, one of the people said. He plans to meet Erdogan halfway, choosing someone that the president won’t view as a staunch supporter of orthodox economic policies, the person said. That’s likely to leave Turkey with a candidate that neither side is truly happy with, he said.

Barring the emergence of an outside candidate, Davutoglu and Simsek may propose Murat Cetinkaya or Ahmet Faruk Aysan, two members of the bank’s rate-setting committee, one of them said. Both were appointed to their current positions while Erdogan was prime minister.

“We generally see that disagreements between the government and Erdogan don’t last very long and often end with a solution where Erdogan’s decisions outweigh the others,” said Inan Demir, chief economist at Finansbank in Istanbul. “With appointment of the new governor, pressure to lower rates without conditions that merit such a cut may emerge.”

Spokesmen for the president and prime minister didn’t immediately respond to requests for comment. This story is based on interviews with senior officials close to both camps, including people involved in deliberations over the central bank governor, over a period of three weeks.

Turkey’s reliance on foreign currency inflows to plug its current-account gap makes the direction of monetary policy crucial for investors. Basci has come under repeated attack from Erdogan and his supporters in government and the press for keeping interest rates too high even as inflation hovers around 9 per cent, almost twice the official target.

Davutoglu’s government and his close circle of advisers, by contrast, is characterised by advocates of fiscal discipline who see curbing the surge in prices as a priority, using tighter monetary policy when necessary.

Basci, who holds a master’s in economics from Johns Hopkins University and a PhD. from Ankara’s Bilkent, was appointed under Erdogan in 2011. He has worked at the bank since 2003 and helped design the interest rates corridor that allows him to fine-tune the cost of lending daily, without officially changing his benchmark interest rate. While Basci could be reappointed to another five-year term, many people close to Erdogan are lobbying in private and publicly for a change of profile.

Erdogan moved to the presidency in 2014 after serving as premier for 12 years, during which his government was credited for shepherding Turkey out of a financial crisis and tripling the size of its economy in current dollar terms.

Davutoglu’s camp has given up on trying to persuade Erdogan to drop his unconventional economic views, particularly his adherence to a theory that says higher interest rates cause inflation, one of the people said. Conventional economic theory holds the opposite to be true, and higher interest rates are normally employed to try and reduce inflation. Erdogan says such policies are flouted by an “interest rates lobby” that’s been exploiting Turkey for decades.

Previous appointments to the top central bank job have also been contentious. In 2006, Erdogan proposed Adnan Buyukdeniz, an Islamic banker, only to have the choice vetoed by then-President Ahmet Necdet Sezer, a staunch secularist. Islamic banking prohibits the use of interest rates. Sezer also vetoed Basci, who was finally appointed governor under Sezer’s successor Abdullah Gul, a co-founder of Erdogan’s ruling party.

A name should be proposed by Davutoglu at around the time Erdogan returns from his trip to the US, according to one person close to Erdogan. An adherent to conventional monetary policy won’t be acceptable, and no candidate who made their career at a foreign bank should be expected to meet with the president’s approval, the person said.

— Washington Post