Turkish central bank Governor Erdem Basci indicated to analysts in London on April 3 that he planned to keep monetary policy tight to control inflation. Less than a week later, after the country’s premier weighed in on the matter, he was sending out different signals.
Basci said he may consider “measured steps” to ease rates, in a speech in the industrial city of Kayseri in central Turkey on April 7. While he also said he doesn’t see a need for emergency cuts, as demanded by Prime Minister Recep Tayyip Erdogan three days earlier, the shift in tone renewed concern that the government is seeking to dictate monetary policy.
Basci raised rates at an emergency session in late January and succeeded in halting a slide in the lira. Most investors say it would be premature to start reversing that policy, with Turkey’s $800 billion economy still threatened by tensions in the run-up to August’s presidential election, and inflation at the highest level since July.
From the perspective of central bank independence, Basci’s response to Erdogan “is a disaster,” even if markets didn’t immediately respond, Ulrich Leuchtmann, head of currency strategy at Commerzbank AG, wrote yesterday. “I fear that the lira’s recovery from its January crisis has feet of clay.”
‘Cut Them Now’
Basci came under added pressure today from Economy Minister Nihat Zeybekci, who said high interest rates aren’t supported by those in the “real economy.” Zeybekci, who spoke in an interview with NTV television, urged the central bank to buy foreign currencies to pad its reserves and bring back “normal” interest rates.
“For whatever reasons the central bank increased rates, it should cut them now,” he said.
The lira has rallied about 9 percent against the dollar since late January. It weakened 0.7 percent to 2.1108 per dollar at 2:10 p.m. in Istanbul. Currency forward data compiled by Bloomberg show the lira will depreciate to 2.14 per dollar in the second quarter.
There were indications, though, that bond investors are now betting Basci is done with raising rates. The yield on two-year debt plunged 45 basis points to 9.96 percent, dropping below 10-year yields for the first time since Jan. 21, a week before Basci’s increase.
Turkish markets plunged after Dec. 17, when a corruption probe into Erdogan’s government was made public. They have recouped most of those losses, with the rally picking up speed after Erdogan’s party won local elections on March 30, easing concerns about political instability.
Capital inflows after the ballot victory may prove short-lived, with tensions over the graft scandal set to persist during campaigns for the presidential vote and then parliamentary elections next year, said William Jackson, an emerging-markets economist at Capital Economics in London.
That risk, plus an inflation rate that remains above the bank’s 5 percent target, warrants the continuation of the central bank’s current tight policy, Jackson said in an e-mailed note. Inflation accelerated to 8.4 percent in March.
Basci is more optimistic about Turkey’s economy than most of the economists and investors calling for rates to stay high. His prediction of growth close to the government’s target of 4 percent this year compares with an average 2.2 percent estimate in a Bloomberg survey in March.
Basci’s latest comments only imply easing when “the macro conditions permit,” Istanbul-based Tera Brokers said in an e-mailed report yesterday. That means rate cuts probably aren’t “imminent,” since inflation expectations aren’t declining, Tera said. Basci said in Kayseri that the bank sets policy based on economic fundamentals, not political pressure. Finance Minister Mehmet Simsek said today the central bank’s independence and credibility are important.
The case for looser policy has been made by Erdogan and allies including Zeybekci, who said this week that “current interest rates are not rates that support Turkey’s production, employment and growth.”
The governor said growth would be propelled by an increase in exports to Europe, and domestic demand that he says will prove more robust than expected.
Basci was warming investors to the idea of rate cuts, which may come early in the third quarter “if not sooner,” Abbas Ameli-Renani, an analyst at Royal Bank of Scotland Group Plc in London, said by e-mail. He said Basci sounded a “lot more dovish” in his Kayseri speech than in the presentation in London, “despite presenting almost identical material.”
Basci raised the one-week repurchase rate to 10 percent from 4.5 percent on Jan. 28 after interventions in the currency market failed to stem the lira’s slide, driven by a worldwide retreat from emerging markets as well as the graft scandal.
Such outflows are especially threatening to Turkey, which has one of the world’s biggest current-account deficits and needs foreign investment to finance it. The gap was $65 billion last year, about 8 percent of economic output.
By signaling that he’s already thinking about taking back some of the rate increases, Basci risks leaving the lira “at the mercy of global influences,” Commerzbank’s Leuchtmann wrote. “And it will probably suffer from them.”