When Sahap Kavcioglu was appointed governor of the Turkish central bank overnight on March 20, 2021, there was great irritation. And not so much because President Recep Tayyip Erdogan had dismissed Naci Agbal, the third central bank president within two years, but because the newcomer had made a name for himself less as a monetary politician than as a columnist for pro-government newspapers. In it, the AKP member – in line with his party leader and president – had castigated interest rate hikes to combat inflation.

Andreas Mihm

Business correspondent for Austria, East-Central, Southeastern Europe and Turkey, based in Vienna.

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In March 2021, the economic consequences of the pandemic were not over, and the Turkish central bank commanded a monetary policy nobody. "A debacle for Turkey's central bank," wrote The Economist. And it has turned out worse than the biggest doubters had expected.

Two years later, it should be noted that Kavcioglu, the former banker, politician and university lecturer, has stayed in office longer than his predecessors, bringing the de jure, but not de facto independent central bank, firmly on the course of the presidential palace and lowering interest rates as instructed. This is unlikely to change. Erdogan is preparing to win Sunday's presidential run-off against Kemal Kilicdaroglu. He has already announced that he will cut interest rates further – even if economists consider interest rates of up to 40 percent necessary in view of high inflation. So it was no surprise that the central bank leadership on Thursday left the key interest rate where it has been since February, at 8.5 percent. A re-elected Erdogan is unlikely to have any reason to replace the head of the central bank.

Failed even by its own standards

Nevertheless, Kavcioglu has failed, even by his own standards. When he took office, he promised to permanently reduce inflation, increase macroeconomic stability, reduce the current account deficit and thus stabilize the lira. What happened was the opposite.

When Kavcioglu took office, one dollar cost 7.50 lira, today it is 20. Consumer prices rose by 15 percent, and today inflation is 43 percent, after peaking at more than 85 percent. (The central bank is aiming for 5 percent.) In turn, Kavcioglu has cut key interest rates by more than half: from 19 percent, which had been the undoing of his predecessor, to 8.5 percent. Kavcioglu has stripped interest rates of their control function and opened the door to inefficient use of resources.

The internal and external stability of the value of the lira is gone, and the confidence of citizens and international investors is low. To this end, Kavcioglu has flooded the Turkish economy with money, fueled consumption and imports, and kept economic growth going. The money and capital markets are manipulated with a variety of regulatory disciplines. Although this has dampened the rapid decline in the value of the lira over the past year, it is likely to mask its serious weakness.

Erdogan's Willing Executor Low Interest Rate Policy

It should be noted that the unconditional enforcement of the president's instructions, who describes interest rates as the devil's work, has probably damaged the economy and worsened the living conditions of millions of people – but has not inflicted the much-expected defeat on Erdogan. In parliament, his AKP continues to set the tone in small losses, and in the race for the presidency he is ahead.

Central Bank Governor Sahap Kavcioglu has played his part in this. But who is this, born 56 years ago in Bayburt, a small town of 80,000 inhabitants in the northeastern Anatolian province, an advocate of a monetary policy that goes against all textbook wisdom (and experience), whose short haircut and thickly grown moustache convey rigor and authority?