New Turkish central bank chief should continue current policy

ANKARA – Turkey’s next central bank governor must not abandon the bank’s tight monetary policy and should vigorously protect the bank’s independence as the country gears up for parliamentary elections in 2007, economists say. The term of incumbent Sureyya Serdengecti, 54, expires on March 13 and the government has not yet said whether it will reappoint him for a further five years or name a new governor. But most analysts expect Serdengecti to leave, noting that he was appointed by the previous administration and has cool relations with Prime Minister Recep Tayyip Erdogan’s government. «The new governor should state clearly that the existing monetary policy will continue with the same discipline and fastidiousness (as under Serdengecti),» said Ekspres Invest economist Ozlem Bayraktar. The new governor should be trusted by the markets and past experience of working in the central bank would greatly help, Bayraktar added. Serdengecti is widely respected in international financial markets for his success in taming inflation and helping to bring stability to an economy racked by financial crisis when he took the helm five years ago. Ozgur Altug, chief economist at Istanbul-based brokers Raymond James, said the central bank’s credibility, gained by reducing inflation to single digits for the first time in a generation, must not be put at risk, nor its independence compromised. «Our overall expectation on this issue is that the government makes a correct assessment and takes the risks into account in making their choice,» Altug said. Bayraktar agreed. «The new governor will be expected to hold firm against government criticism and to avoid taking populist stances,» she said. The names of several possible candidates to replace Serdengecti are being discussed by analysts but none have been confirmed as candidates and there are no clear favorites. Politicians, businessmen Some ruling party lawmakers as well as Turkish manufacturers and exporters have stepped up criticism of the central bank over its tough monetary policy, which has pushed the lira higher and exacerbated Turkey’s gaping current account deficit. They say the central bank’s interest rate cuts have not kept pace with falling inflation and that, as a result, Turkey continues to attract short-term and speculative portfolio investments that have bolstered the lira. The bank cut interest rates nine times in 2005 but has kept them on hold so far this year, citing continued inflation risks. Inflation came in just under the government’s 8 percent target last year, but the bank is worried that Turkey will overshoot its 2006 target of 5 percent. The lira reached a one-year high in Thursday-dated trade. «Big uncertainties lie ahead,» said one banker. «The new governor should be somebody who can… make quick decisions as Turkey passes through a period of high current account deficits, high short-term capital flows and increased short-term debts,» said the banker, who requested anonymity. Political pressures on the bank are certain to mount as Turkey’s political parties start preparing for parliamentary elections due by November 2007 at the latest. The new governor must conduct a frank and open dialogue with the government and be ready, if necessary, to criticize the Cabinet publicly, economists said. The government is not expected to announce its decision before Serdengecti’s term expires on March 13. It could also delay a decision on replacing him, appointing an acting governor from among the deputy heads of the bank assembly.