Turkey's central bank approach: keep calm and defy Erdogan

Published April 9th, 2014 - 05:04 GMT
In an apparent step to distance itself from political pressure, Turkey's central bank said on Monday that the bank will decide for itself on the timing of any future interest rate cuts.
In an apparent step to distance itself from political pressure, Turkey's central bank said on Monday that the bank will decide for itself on the timing of any future interest rate cuts.

In an apparent step to distance itself from political pressure, Turkey's central bank said on Monday that the bank will decide for itself on the timing of any future interest rate cuts, defying last week's calls from Prime Minister Recep Tayyip Erdoğan for an emergency rate cut. 

In the wake of his victory in the local elections on March 30, Erdoğan said on Friday last week that markets had started to react positively to the election and that he expected the central bank to convene an extraordinary Monetary Policy Committee (PPK) meeting to lower interest rates. Erdoğan said he believes lower rates will encourage investors. 

In his first public reaction to Erdoğan's comments, Central Bank Governor Erdem Başçı said at a press conference in Kayseri on Monday that his preferred strategy was to lower rates gradually and that he saw no current need for an extraordinary rate-setting meeting. A large rate cut should not be expected, he added. 

Deputy Prime Minister Ali Babacan said on Friday that is not appropriate for political figures to say too much about the central bank. “It's very natural that the bank takes note of what we say. But when we talk too much it is perceived as if we have an influence on the bank," he said. 

Investors have long been concerned about Turkey's government pressuring the central bank to keep rates artificially low as it moves into an election cycle. They have warned that this would be detrimental for Turkey's struggle to reduce inflation and its trade imbalances. 

Erdoğan's call for an emergency rate cut revived concerns about political pressure on the central bank. The prime minister has been a vocal critic of high borrowing costs, denouncing what he terms an "interest rate lobby" of speculators. Although he still trod a careful line, Başçı's statements were largely aimed at underlining the independent structure of the central bank amid increased government attempts to intervene in the bank's decisions. 

The central bank governor said "measured" rate cuts were a possibility but that he saw no current need for an extraordinary monetary policy meeting. "It's the monetary policy committee that determines when rate cuts begin, but measured rate cuts are possible in the future," Başçı said, hinting at interest rate cuts for the first time in a year. "When we cut rates we do it step by step [and] keep our tight stance. We protect both confidence and stability," he added. "A rate cut with a big volume should not be expected. It's beneficial to take measured steps." He said the bank's overnight lending rate was "very tight" at 12 percent and that it had "room for maneuver" to reduce it gradually to 10 percent if needed. 

Short-term bond yields fell on Başçı's comments. The two-year benchmark yield dropped to 10.34 percent from 10.50 percent. The lira weakened to 2.12 to the US dollar from 2.1086 at the end of last week, while stocks outperformed emerging market peers. 

Premature 

The central bank stunned markets with a massive rate hike at the end of January, ignoring political pressure -- Erdoğan had spoken against such a move just hours earlier -- as it battled to defend the lira after it slumped to record lows. 

Başçı said in London on Thursday that the bank's current policy was sufficient to tackle inflation, even though consumer prices rose more than expected in March. Several economists, surprised by Başçı's comments on Monday, said any talk of rate cuts looked premature. "In our view, considering that headline inflation stands above 8 percent while core indicators recently breached 9 percent, it is too early to start talking about policy rate cuts," said Deniz Çiçek, economist at Finansbank in İstanbul. 

The bank has already been easing liquidity by providing more funding at its repo auctions, a move that TEB-BNP Paribas strategist Erkin Işık said meant interbank rates were likely to slip to 11.5 percent from 12 percent in the coming days. 

"They have ample room to ease through liquidity policy first, before resorting to rate cuts," Işık said. "If they ease interbank rates to 10 percent without seeing an improvement in inflation outlook, that would be a substantial move and I think would impair the strong performance of lira." Turkey's growth in the past decade has largely been based on the stability seen since Erdoğan came to power in 2002. But growth is slowing, inflation stays above target and consumer confidence hit a four-year low in February. Erdoğan is expected to run in the presidential election in August. 

Earlier on Friday ratings agency Fitch cut its growth forecasts for Turkey, citing slower domestic lending growth and signs that consumer and investor confidence are moderating. It now sees the economy expanding by 2.5 percent in 2014, compared with a previous estimate of 3.2 percent.


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