Basci May Change Turkish Rates Policy When Erdogan Picks Next Bank Chief

Erdem Basci, the frontrunner to take over as Turkey’s central bank chief this month, may be forced to start reversing a cheap-money policy he helped devise, with inflation set to accelerate from a four-decade low.

Prime Minister Recep Tayyip Erdogan will nominate Basci, currently a deputy to Governor Durmus Yilmaz, for the top job at the Ankara-based bank when Yilmaz’s five-year term expires April 18, according to 14 of 19 economists surveyed this week by Bloomberg News.

Rising oil prices mean the next governor may need to increase interest rates to pare inflation that the central bank says will overshoot this year’s target of 5.5 percent. The bank has cut interest rates by 75 basis points since December to help slow capital inflows, while increasing reserve requirements to cap growth in loans.

Yilmaz’s replacement will inherit a monetary policy that’s “unorthodox,” Michael Gomez, Munich-based co-head of emerging markets at Pacific Investment Management Co., manager of the world’s biggest bond fund, said in a telephone interview last week. The risk is the bank may be “forced into an episode akin to what happened in 2006” when it added 4.25 percentage points to rates in two months as inflation accelerated, he said.

Treasury Undersecretary Ibrahim Canakci, Ibrahim Turhan, a colleague of Basci’s at the central bank in Ankara, and chief bank regulator Tevfik Bilgin also were cited as candidates in the survey. The next governor won’t be announced until Yilmaz’s term expires, Deputy Prime Minister Ali Babacan said yesterday.

‘Many Durmus Yilmazes’

“There are many people who would be as successful” as Yilmaz, Deputy Prime Minister Bulent Arinc said in an interview in Washington. “We have many Durmus Yilmazes in Turkey. But possibly, of course, one of his deputies will take the lead.”

Basci, 44, was the official whose paper, published on the central bank’s website on Dec. 11, flagged the latest monetary policy of low rates and higher reserve requirements, surprising investors and prompting a decline in bonds as banks sold assets to meet the extra commitments. The central bank reaffirmed its adherence to the policy in a March 23 statement, adding that new data or information may lead to revisions.

Basci was a student at a private high school in Ankara at the same time as Babacan, who is in charge of the Treasury and the government’s economic policy. Basci acted as Babacan’s adviser in 2003 before he was appointed to the bank. He served as acting governor for a month in 2006.

Basci declined to say whether he will be a candidate to replace Yilmaz during a March 29 interview in Prague. The bank’s main tasks this year will be to narrow the current-account gap and pare loan growth, he said.

Credibility

Basci “is well-regarded and people see him as a developer of many policies in recent years, so he has a role in the credibility the bank has accumulated,” Yarkin Cebeci, an Istanbul-based economist for JPMorgan Chase & Co., said in a phone interview yesterday. “At some point, the bank will have to return to traditional methods and start hiking rates. Any delay to reacting to a probably increase in inflation could hurt credibility.”

The prospect of rate increases mean the lira is forecast to gain 6.3 percent by the end of the year, the most among major emerging markets, according to data compiled by Bloomberg.

The lira fell to 1.619 per dollar on March 3, the lowest in almost two years, as the bank kept rates at a record low to stem capital inflows. Policy makers are expected to raise the key lending rate by 75 basis points to 7 percent by the end of the year, the median estimate of seven banks showed.

Lira Appreciation

“The lira’s appreciation may be more marked in the second half,” Erkin Isik, a strategist at Turk Ekonomi Bankasi in Istanbul, said by telephone. The currency was little changed at 1.516 per dollar at 11:10 a.m. in Istanbul.

Inflation slowed to a 40-year low of 4 percent last month and will now accelerate as rising global commodity prices feed into the domestic economy, the central bank said on April 5. Gross domestic product expanded 8.9 percent last year, a pace Basci called “very rapid”. Restraining credit growth is the bank’s priority, he said on March 29.

In his policy document posted on the bank’s website in December, Basci explained why that goal was better achieved by higher reserve requirements than by interest rate increases.

Excess Liquidity

He said that Turkey should keep rates low in order to deter destabilizing short-term inflows of excess liquidity issued by the U.S. Federal Reserve and the European Central Bank. The “hot money” may create asset bubbles, pump up growth and widen the current account to “levels that threaten financial stability,” Basci wrote.

Basci was Erdogan’s preferred candidate for central bank chief ahead of Yilmaz five years ago, though his nomination was rejected by then-President Ahmet Necdet Sezer, according to news reports at the time. Basci’s wife, like Yilmaz’s, wears an Islamic-style headscarf that upholders of Turkey’s secular constitution, such as Sezer, see as a symbol of Erdogan’s efforts to allow a wider role for religion. Sezer also blocked the candidacy of Adnan Buyukdeniz, an Islamic banker. Abdullah Gul, a political ally of Erdogan, replaced Sezer in 2007.

Two economists predicted that Yilmaz will be succeeded by Canakci, who has helped Turkey complete two International Monetary Fund programs since taking over at the Treasury in 2003.

Another two economists backed Turhan, who has been on the monetary policy committee since 2006. Prior to joining the bank in 2004, Turhan worked as editor at Anlayis magazine, writing articles urging authorities not to let the markets determine policy. And one opted for Bilgin, who has overseen a banking industry that survived the global crisis without a bailout.

To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net; Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net

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