How does a central bank fight inflation? Raise interest rates, right?

Wrong answer. Or at least it is, if you’re in Turkey.

As central bank Governor Erdem Başçı’s five-year term expires next week, he stands accused of maintaining inflation at almost twice his own 5% target by keeping interest rates too high.

He’s been chastised as ‘cowardly’ and ‘a traitor’ for sticking to old-fashioned textbook economics by those closest to President Recep Tayyip Erdoğan in Turkey’s pro-government media.

The newspapers, by contrast, are increasingly amenable to the President’s view of the world. One report that accused Erdoğan’s regime of smuggling arms to Syrian rebels has left two journalists facing life sentences amid an international outcry over diminishing press freedom.

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In fact, the media is little different from any other sector of present-day Turkish industry or government. The state has become increasingly brazen in its seizure of opposition business interests such as Bank Asya and its parent company, Kaynak Holding. In the past year, thousands of opposition-leaning judges and prosecutors have been re-assigned.

Members of Erdoğan’s inner circle head the economy and finance ministries. His son-in-law, Berat Albayrak, is Minister for Energy and Natural Resources, now a critically important sector in the wake of Turkey’s diplomatic spat with Russia.

In this sense, the central bank has been an anomaly – a single thorn in the President’s side.

Surprise Cut

In opposition to the central bank’s orthodoxy, Erdoğan and his widening band of ‘yes’ men have consistently pushed for zero interest rates. Until last month, Başçı had succeeded in resisting the pressure. Then, on March 23, the central bank unexpectedly cut its headline rate by a quarter-point – a small decline relative to the overnight lending rate at 10.5%. The surprise was in the timing.

Basci’s decision came on the heels of an economic expansion that notched 5.7% year-on-year growth in the fourth quarter. Such positive economic development wouldn’t normally be expected to prompt monetary loosening.

If this was a show of acquiescence from Başçı in the hope of clinching a second term, it failed.

One of Erdoğan’s most trusted and zealous supporters, Cemil Ertem, a columnist for the pro-government Daily Sabah and Akşam, was scathing in his criticism of Başçı for not making a deeper cut.

Despite his questionable competence in matters of monetary policy, Ertem’s views carry weight. He was supposedly given joint charge of the Treasury during the interim period between the failed June election and the AK Party’s victory last November. His opinion can be reliably interpreted to reflect the President’s.

Battle for Succession

And so, with his last-gasp rate cut proving too little, too late, Başçı on April 19 hands the reins to the next fall guy. There has been a battle for succession between two interest blocs.

In one corner: the President. Although not yet legally prescribed the full executive authority that he covets, Erdoğan has worked tirelessly to shift state decision-making under his ever-expanding aegis.

The pro-government Daily Sabah had identified two figures close to the President as potential candidates. The first, Şakir Ercan Gül, is Chairman of the Savings and Deposit Insurance Fund. Over the past three years, Gül has overseen the state-enforced takeover of private banks and companies on dubious allegations of corruption and financial irregularity.

Yet more worrisome among Sabah’s favorites was Hüseyin Aydın. Although never charged, the General Manager of Ziraat Bank, Turkey’s largest state lender, was implicated in the massive 2013 corruption probe into informal crony networks around Erdoğan. Aydın was allegedly heard in recordings bypassing rules on credit limits in approving loans to businessmen close to the AKP for the purchase of the ATV-Sabah Media Group.

Aydın’s appointment would have been a clear victory for Erdoğan. The President would have had considerable leverage over him; his compliance with Erdoğan’s view of monetary policy priorities would have been assured along with support for massive state investment in construction projects and infrastructure.

So why wasn’t he picked? Ghosts from the 2013 corruption scandal resurfaced last month with the US arrest of Reza Zarrab.

While Erdoğan exonerated Zarrab by quashing all charges against him and others, the impending US trial is bound to spark renewed allegations of links to corruption within the President’s orbit.

Provoking further claims of nepotism through the appointment of Aydın might have appeared too blatant – even for Turkey’s all-powerful president.

Advance of the Moderates

In the opposing camp for influence over the central bank is Prime Minister Ahmet Davutoğlu. His allies in promoting economic orthodoxy and internationalist sentiment are the Deputy Prime Minister and ex-Finance Minister Mehmet Şimşek, and former Deputy Prime Minister for the Economy, Ali Babacan.

Babacan and Şimşek are credited with engineering impressive economic growth during the AK Party’s 14 years in power.

Their favored moderate candidates were Ahmet Faruk Aysen, on the central bank’s Board of Directors, and Deputy Governor Murat Çetinkaya.

While both have the advantage of being nominated for their current positions with the explicit blessing of then-Prime Minister Erdoğan, Çetinkaya had the advantage: he began his career at Albaraka Türk, an Islamic lender.

Balancing Act

In this sense, Çetinkaya, whose appointment was confirmed by the Cabinet this week, is the compromise candidate between the moderates and ideologues. The second-youngest governor in the central bank’s 85-year history, Çetinkaya’s background in Islamic finance is likely to have been the sweetener that convinced Erdoğan to accept the nomination.

He also has an extensive professional career in global finance and has been a solid presence behind Başçı in the face of political interference.

While emphasizing the need for a central bank to preserve price stability, Çetinkaya has cited promoting economic growth as the other core task.

His appointment signals more of a balance in the Erdoğan government. Although still nominally influential figures, Babacan and Şimşek had been side-lined from any effective oversight or management of economic affairs. Davutoğlu had been seen as representing little challenge either; Erdoğan picked him as Prime Minister on account of his malleability.

It is for these reasons that investors cheered Çetinkaya’s announcement this week, buoying the lira.

But history indicates that his honeymoon is unlikely to last. Fail to cut interest rates enough, and the President’s more pliant candidates will be waiting in the wings.

The author is Jack A Kennedy, lead Middle East & North Africa analyst at West Sands Advisory Ltd. An Arabic speaker, Jack has travelled the wider region and last worked in the Middle East in 2014 with the European External Action Service. West Sands Advisory Limited is a business intelligence, investigations and political advisory firm that has, since 2006, helped clients identify opportunities and reduce risk in emerging and frontier markets www.westsandsadvisory.com.