Turkey Central Bank ‘Outsmarted’ Investors, SocGen Says

Turkish central bank Governor Erdem Basci “outsmarted” many investors with a dual rates policy that has made Turkey “the Mediterranean safe haven,” Societe Generale SA (GLE) said.

“All credits to the central bank for having built up some considerable credibility even though it all started with a lot of confusion and misunderstanding,” Benoit Anne, head of emerging-markets strategy at Societe Generale in London, said in an e-mailed note to clients today. “The central bank of the Republic of Turkey has outsmarted a lot of investors and strategists. Even the ratings agencies seem to agree.”

Moody’s Investors Service upgraded Turkey’s credit rating to Ba1 today, one level below investment grade, from Ba2, citing a significant improvement in public finances and policies to address a current-account deficit that was $69.2 billion in the 12 months to April. The government targets a budget deficit of 1.5 percent of gross domestic product this year.

Basci introduced a dual rates policy in October that allows him to vary the rate at which he provides funding to banks between the benchmark rate of 5.75 percent and a higher rate of 11.5 percent. The policy is gradually reducing imbalances in Turkey’s economy while creating a “healthier” foundation for growth, he wrote in an article in the Turkish policy magazine Iktisat ve Toplum in April.

‘Massive Easing’

The central bank may cut rates “if the depreciation pressures on the lira disappear,” Anne said. “At 1.70 per dollar, it is all go for some massive easing, which will further boost appetite for lira assets.”

The lira strengthened 0.4 percent to 1.7941 at 5:55 p.m. in Istanbul, appreciating for a seventh day in its longest streak of gains since October. Yields on two-year government bonds fell eight basis points, or 0.08 percentage point, to 9.01 percent, the lowest since February.

The nation’s benchmark gauge ISE National 100 Index rose 0.4 percent to 59,401.26, up for a second day and at the highest level since April 30. The measure has gained in 13 out of the 14 past trading sessions.

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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