lessons from the removal of central bank autonomy

December 17, 2021 | 5:00 a.m.

The intervention of the President of Turkey, Recep Tayyip Erdoğanin the monetary policy of his country leaves lessons on the consequences of reduce the autonomy of central banks, a few weeks later Victoria Rodriguez Ceja will become the next governor of Bank of Mexico (Banxico).

Rodríguez Ceja was appointed by the president Andres Manuel Lopez Obrador to replace the current Governor of Banxico, Alexandre Diaz de Leonafter the chief executive reversed his decision to appoint the former treasury secretary, Arthur Herrerawhich took the financial markets by surprise.

Read also : Díaz de León, the Governor of Banxico who dealt with 4 Secretaries of the Treasury

The arrival of Rodríguez Ceja, who will become the first governor of the monetary entity, comes at a time when inflation in mexico is at its highest level in 20 years. Considering this, Banxico decided this Thursday raise the benchmark rate by 50 basis pointsto place it at 5.50%.

As a change in Banxico’s board approaches, one would expect the new governor to consider this situation unfolding in Turkey. This is a lesson because it is important that the central bank of each country has the support to act freely

said Janneth Quiroz, deputy director of economic analysis at Monex

The central bank of Turkey cut its benchmark rate by 100 basis points on Wednesday, to 14%, despite the fact that inflation in the country rose in November to 21.31%. Since September, the agency has reduced the rate of 500 basis points, contrary to the upward cycle that most emerging economies have begun.

Interest rate cuts have had Erdogan’s influence because the president considers that high rates drive up inflation, something totally opposite to what economic orthodoxy dictates.

Indeed, since 2016, the Turkish President replaced four central bank governors of Turkey and this month Lufti Elvan resigned as finance minister after rejecting Erdogan’s monetary strategy and continued interference in the central bank.

Rodríguez Ceja generates doubts

The way in which Rodriguez Ceja She was chosen by López Obrador and her lack of experience in managing monetary policy casts doubt on the tone she will adopt once she takes office as governor of Banxico.

What Banxico made us realize is that it is very solid, which is why we are confident, but the risk is latent, especially because of the way it was chosen, overnight, with a context non-monetary. President flirts with profiting from Banxico, but knows that’s playing with fire

commented Jorge Gordillo, director of economic analysis at CI Banco

The specialist pointed out that there is a risk that the next votes of the board of directors be a little more divided; however, inflationary pressures put Banxico against the wall, as its mandate is to contain price increases.

Among the current members, Deputy Governor Gerard Esquivel showed one more tone dovish with rate increases. In the last decision, he was the only one to vote for a 25 basis point increase, whereas in previous months he had chosen to leave it unchanged.

“The fact that there is a discussion or a debate within the board where different points of view are discussed is the best. In the end, the majority decision is made. Decisions are made with the vote of at least three people,” Quiroz said.

Market assignments

State intervention in central banks is causing a stir among investors and causes significant depreciation of currency rates. To illustrate, the Turkish lira hit an intraday record low of 15.7270 to the dollar in trading on Thursday, according to Bloomberg data.

so far this year, turkish lira accumulates a drop of more than 50% against the dollar and is the most depreciated currency among emerging currencies, followed by the Argentine peso, the Chilean peso, the Colombian peso and the Peruvian sol.

“Erdogan made many decisions that scared off investors, since he was in government he generated a lot of currency depreciation,” Gordillo pointed out.

When AMLO appointed Rodríguez Ceja in November, the Mexican peso has experienced episodes of volatility, but within days the exchange rate stabilized at levels below 22 pesos to the dollar. The future risk will depend on whether the new governor has no bias related to the president’s policies.

You may be interested: Díaz de León keeps the weight more stable than Agustín Carstens and Guillermo Ortíz

Increase in the minimum wage in Turkey, an additional risk

The minimum wage in Turkey It will rise by 50% from 2022, a move that may prolong inflationary pressures in the country if a different course is not followed in monetary policy and amid stagnating productivity in the country, analysts say. .

The government says the minimum wage will rise to 4,250 Turkish liras from 2,826 Turkish liras as Erdogan’s popularity wanes due to his questionable handling of interest rates and the collapsing exchange rate .

Do not miss: Mexico, with the third highest inflation in Latin America

The sharp depreciation of the currency is expected to push inflation up to 30% in the coming year, which will further affect Turkish incomes and savings.

In the most recent announcement, the central bank said it would assess the effects of interest rate cuts to determine its next moves.

Leave a Comment