Turkey AKP's Plan Drops Central Bank Independence Reference

  • Comparison with last program from 2014 shows omission
  • Deputy PM Simsek says wording doesn't alter bank independence

Turkey’s new government program omitted the word “independent” in reference to the central bank’s choice of monetary policy and tools for the first time since the ruling AK Party came to power in 2002. The lira dropped.

The government said the wording change in the program unveiled on Wednesday doesn’t reflect a curtailment of policy makers’ autonomy.

The omission comes amid heightened fears that the bank will come under renewed pressure after the AK Party cemented its grip on power in Nov. 1 elections. President Recep Tayyip Erdogan and his allies in previous governments have accused monetary policy makers of slowing economic growth with excessively high interest rates.

The new program says “it will continue to be fundamental that the central bank directly determine by itself the monetary policy tools it will utilize to attain price stability.” The last program, from September 2014, said the central bank “will continue to determine monetary policy and the monetary policy tools it will use to attain price stability in an independent fashion.”

Turkey’s recently appointed Deputy Prime Minister Mehmet Simsek, the $800 billion economy’s foremost chief, said “speculation over wording on central bank independence in the new government program doesn’t reflect the truth.”

“The main duty of the central bank is to maintain price stability. It will continue to independently determine monetary policy instruments,” Simsek said on Twitter.

The lira was trading 0.5 percent lower at 2.9038 per dollar at 11:26 a.m. in Istanbul.

Bora Tamer Yilmaz, an economist at Ziraat Yatirim in Istanbul, said the market “is trying to read too much into this.”

“We should focus on the meaning rather than individual words,” Yilmaz said by e-mail today. “Turkey has improved itself during the last decade in establishing modern institutions, and we are not expecting that process to unwind.”

The government may want to coordinate its economic policies with the central bank without interfering in its policies, Piotr Matys, a foreign-exchange strategist at Rabobank International in London, said by e-mail.

That said, the central bank has often been under “tremendous political pressure to cut rates, which left foreign investors particularly sensitive to any measures from the government that could be interpreted as direct or indirect interference in monetary policy,” Matys said.

Prime Minister Ahmet Davutoglu announced his new cabinet on Tuesday, leaving out Ali Babacan, who helmed Turkey’s economy on and off for more than a decade. His exclusion and other cabinet changes may be seen as a “negative” development, while the appointment of “fiscally conservative” Simsek to Babacan’s position “partly offsets this,” Gabor Ambrus, a London-based economist at Royal Bank of Scotland Group, said in a Nov. 24 note.

Although central bank Governor Erdem Basci’s term can be renewed when it expires in April 2016, the new cabinet’s makeup increases the “possibility of a choice of a more dovish’ candidate,’’ Ambrus said.

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