Uncertainty over central bank weighs on Turk monetary policy

ANKARA (Reuters) – Uncertainty over who will replace Sureyya Serdengecti, nearly two weeks after he stood down as Turkey’s central bank governor, has limited the bank’s room to use its main policy tool, short-term interest rates. Whenever the bank’s new management is in place it will not now be able to relax monetary policy even if it wants to for fear of hurting investor confidence, economists said yesterday. Turkish President Ahmet Necdet Sezer, a staunch secularist, last week rejected the Islamist-rooted ruling party’s choice for governor, Adnan Buyukdeniz. Buyukdeniz heads the interest-free finance group Albaraka Turk, who follows Erdem Basci. Basci, a former deputy central bank governor seen as close to Economy Minister Ali Babacan, is now interim governor. «The central bank cannot make policy changes now because its results would be very serious in such a jittery environment,» a senior economic official told Reuters on condition of anonymity. The bank will probably delay cutting interest rates, even though inflation is expected to fall in March and April, because this could be interpreted as a politically motivated decision. «A central bank rate cut now requires courage,» he said. Having cut interest rates nine times in 2005, the bank has kept interest rates on hold since December, though it signaled last week – before news of Sezer’s veto – that a cut in the short-term rate was more likely than it had been in February. Turkey has promised the International Monetary Fund that it will continue to pursue a prudent monetary policy guided by inflation targets under a three-year, $10 billion standby deal. But that policy is under fierce attack from manufacturers, who say it has led to an overvalued lira which has hit their sales and has made imports much cheaper. Following Serdengecti’s retirement, one of his four deputy governors retired and two requested to. Basci was the fourth deputy governor. Resisting pressure A government minister recently proposed that the bank should buy more dollars to help exporters. Others have called for softer lending to businesses to help fight rising unemployment. Under Serdengecti, the bank firmly resisted such pressures and successfully cut annual inflation to below 10 percent for the first time in a generation. «A respectable governor should resist pressure from outside… A central bank chairman worthy of his seat will avoid moves endangering the inflation programme,» said JP Morgan chief economist Yarkin Cebeci. Danske Bank senior analyst Lars Christensen said President Sezer’s veto was a negative for Turkish markets because it prolonged the uncertainty over future monetary policy. «(But) interim governor Basci will remain in charge at the central bank for the time being, meaning that monetary policy in Turkey will likely continue on its prudent path,» Christensen said in an investment note. Economy Minister Ali Babacan has tried to ease market worries about the central bank, saying that its basic policies, such as a floating exchange rate regime, will remain unchanged, regardless of who becomes the next governor. Babacan said that the central bank’s fundamental priority of price stability would never change. Turkey’s central bank abandoned its currency peg regime in 2001 during a deep financial crisis, opting for a floating exchange rate regime. In the last three years, the lira has significantly strengthened owing to growing investor confidence as well as strong macroeconomic fundamentals. The bank has used the rise in the supply of foreign exchange to build up its international reserves through daily purchase auctions and interventions. Foreign exchange reserves were at $58.284 billion on March 17, compared with $50.518 billion at end-2005. The reserve buildup is aimed at shielding Turkey from external shocks such as a sudden fall in emerging market appetite, as well as a widening current account deficit.