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RPT-Turkish central bank governor sets himself credibility test
August 29, 2013 / 7:12 AM / 4 years ago

RPT-Turkish central bank governor sets himself credibility test

(Repeats late Wednesday item without changes)

* Governor all but rules out rate hikes to defend lira

* Emerging market rout, Syria tensions weigh on Turkey

* Political expediency seen behind Basci comments

By Seda Sezer

ISTANBUL, Aug 28 (Reuters) - Turkish Central Bank Governor Erdem Basci has set himself a huge credibility test by forecasting the lira will strengthen this year from record lows, while vowing not to hike interest rates to help it do so.

With investors piling out of emerging markets as the U.S. Fed prepares to wind down its monetary stimulus, Western allies mulling air strikes on Syria, and uncertainty before elections next year, predicting a stronger lira is ambitious.

But by simultaneously ruling out the use of interest rates, an obvious tool to support the currency, Basci left many economists scratching their heads over his comments on Tuesday.

“It makes me wonder if the governor ... is waking up this morning hoping that yesterday was all a dream, and thinking ‘did I really say that’,” Timothy Ash, head of emerging markets research at Standard Bank, said in a note to clients.

“The reality is that his comments yesterday were nothing if not remarkable for an experienced and in many ways exceptionally talented central banker,” he said, noting that they appeared to be a “brave attempt” at verbal intervention.

If so, they did not immediately have the desired effect.

The lira continued its slide on Wednesday, hitting new record lows against both the dollar and its euro/dollar basket.

In his comments to the state-run Anadolu news agency, the usually media-shy governor said it would be “unsurprising” if the lira recovered to 1.92 to the dollar by year-end, some way from the depths around 2.07 it plumbed on Wednesday.

He said the bank had $40 billion in reserves which it could use to shore up the lira and would intervene defensively as needed, as well as making “surprise manoeuvres” to support the currency.

But he made clear the “interest rate weapon” would not be used.

“We will defend the lira’s value like lions,” he told AA Finans (, cracking jokes and repeatedly using expressions like “trust me”, “you will see” and “we are comfortable”.

Not all were convinced.

“An uninspiring message by the central bank governor, who does not really want to use a policy bazooka,” said Benoit Anne, head of emerging markets strategy at Societe Generale in London.

“Sorry but in these exceptional times, only a policy bazooka is going to work ... With all these wishy-washy moves, a lot of damage has been done on the credibility front.”


Highly respected for his prodigious command of academic theory, Basci sees himself as a maverick central banker free to experiment with policy tools often untested by more orthodox peers, those who have worked closely with him say.

Central bank insiders describe a highly centralised decision-making process around Basci, who is surrounded by monetary policy committee members also largely from academic backgrounds and reluctant to challenge him.

Ambiguity has been his stock-in-trade, with investors at times baffled by the bank’s complex policy mix.

In Tuesday’s rare interview, Basci insisted that he was trying to send a clear message.

“I am neither a hawk nor a dove. I am not a bird,” he said, when asked to summarise his stance.

“I am trying to be clear on monetary policy.”

Emerging economies have borne the brunt of heavy selling in recent weeks due to concern that the U.S. Federal Reserve will soon start reducing the bond-buying programme which had given investors a steady supply of cheap money to channel into financial assets offering higher returns, such as Turkey‘s.

Turkey is particularly vulnerable because it is heavily dependent on foreign inflows to finance its current account deficit, running at over 7 percent of national output.

Concern about the consequences of a possible U.S.-led intervention in neighbouring Syria and the uncertainties of an election cycle beginning next year have further dampened its appeal.

That could pile on pressure for a rate hike.

“Basci’s comments in general suggest that the central bank will go through a huge credibility test in a short time,” said Fatih Keresteci, a strategist at HSBC.

Raising interest rates makes lira assets more attractive to foreign investors, supporting the currency, but could also crimp economic growth, something Prime Minister Tayyip Erdogan’s government is eager to avoid ahead of elections.

Some analysts saw Basci’s resistance to the possibility of rate hikes as further evidence of political expediency, with Erdogan and some of his ministers vocal champions of low rates.

“This will surely play into the hands of those arguing that the central bank is not independent,” said Standard Bank’s Ash.

“The eventual rate hike now to stabilise the situation is likely to be much more aggressive, and the danger is that the bank’s credibility will be significantly damaged as a result.”

Editing by Nick Tattersall/Ruth Pitchford

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