New Turkish Central Bank Governor May Increase Interest Rates

Turkey’s new Central Bank governor may be forced to start reversing a low interest-rate policy as inflation accelerates.

Prime Minister Recep Tayyip Erdoğan could nominate Başçı as the bank’s next chief when Durmuş Yılmaz’s five-year term expires April 18, according to 14 of 19 economists surveyed this week by Bloomberg News.

Rising oil prices mean the next governor may need to increase interest rates to pare inflation that the Central Bank says will overshoot this year’s target of 5.5 percent. The Bank has cut interest rates by 75 basis points since December and increased reserve requirements in the banking industry to help slow capital inflows and growth in loans.

Yılmaz’s replacement will inherit a monetary policy that’s “unorthodox,” Michael Gomez, Munich-based co-head of emerging markets at Pacific Investment Management Co., said in an interview last week. The risk is the bank may be “forced into an episode akin to what happened in 2006” when it added 4.25 percentage points to rates in two months as inflation accelerated, he said.

Treasury Undersecretary İbrahim Çanakçı, İbrahim Turhan, a colleague of Başçı’s at the Central Bank and chief bank regulator Tevfik Bilgin also were cited as candidates in the survey.

The next governor will not be announced until Yılmaz’s term expires, Deputy Prime Minister Ali Babacan said Wednesday.

Başçı, 43, was the official who published the latest monetary policy of low rates and higher reserve requirements for banks in a paper on the Central Bank’s website Dec. 11, surprising investors and prompting a sell-off in bonds as banks sold assets to meet the extra commitments. The Central Bank reaffirmed its adherence to the policy in a March 23 statement, adding that new data or information may lead to revisions.

Close ties with Babacan

The deputy governor was a student at a private high school in Ankara at the same time as Babacan, who is in charge of the Treasury and the government’s economic policy. Başçı acted as Babacan’s adviser in 2003 before he was appointed to the Bank. He served as acting governor for a month in 2006.

Başçı “is well-regarded and people see him as a developer of many policies in recent years, so he has a role in the credibility the bank has accumulated,” Yarkın Cebeci, an Istanbul-based economist for JPMorgan Chase, said Wednesday. “At some point, the Bank will have to return to traditional methods and start hiking rates. Any delay to reacting to a probably increase in inflation could hurt credibility.”

The prospect of rate increases mean the Turkish Lira is forecast to gain 6.3 percent by the end of the year, the most among major emerging markets, according to data compiled by Bloomberg. The lira fell to 1.61905 per dollar on March 3 as the Central Bank kept rates at a record low to stem capital inflows. Policy makers are expected to raise the key lending rate by 75 basis points to 7 percent by the end of the year, the median estimate of seven banks showed.

“The lira’s appreciation can be more marked in the second half,” Erkin Işık, a strategist at Türk Ekonomi Bankası, said.

Higher inflation expected

Inflation slowed to a 40-year low of 4 percent last month and will now accelerate as rising global commodity prices feed into the domestic economy, the Central Bank said on April 5. Gross domestic product expanded 8.9 percent last year, a pace Başçı called “very rapid.” Restraining credit growth is the priority, he said March 29.

Başçı was PM Erdoğan’s preferred candidate for Central Bank chief ahead of Yılmaz five years ago, though his nomination was rejected by the then-President Ahmet Necdet Sezer. Sezer also blocked Erdoğan’s candidacy of Adnan Büyükdeniz, an Islamic banker. Abdullah Gül replaced Sezer as president in 2007.

In his policy document posted on the Central Bank website in December, Başçı said that Turkey should keep rates low in order to deter destabilizing short-term inflows of excess liquidity issued by the U.S. Federal Reserve and the European Central Bank. The “hot money” may create asset bubbles, pump up growth and widen the current account to “levels that threaten financial stability,” he wrote.

New central bank chief may be forced to reverse policy

April 7, 2011
SOURCE: HURRIYET DAILY NEWS