Central bank moves to shore up embattled lira, rein in inflation

Following up its previous attempt to curb the depreciation of the Turkish lira with a series of daily dollar auctions, Turkey’s central bank took yet another proactive step on Wednesday, announcing that the bank “will take every necessary measure to maintain price stability,” signaling that it will begin to take sharp measures to rein in the country’s rising inflation.

Central Bank of Turkey Governor Erdem Başçı

Central Bank of Turkey Governor Erdem Başçı

Turkish Central Bank Governor Erdem Başçı shared the details of a five-point plan along with the bank’s quarterly inflation report at a press conference Wednesday in Ankara. Observers touted the bank’s ability to react to developments in markets in time, adding that the strong messages to markets could lead to an increase in inflation. The possibility of such an outcome is also acknowledged by the bank. The bank revised its 2011 year-end inflation expectations up to 8.3 percent from the previous 5.2 percent. The bank, however, has faith that these short-term revisions will not effect medium-term inflation expectations and outlook.

The bank’s inflation report said inflation is forecast to increase significantly in the short term, while the monetary tightening is expected to contain inflationary pressures in the middle run. For the first time in more than five years, the central bank last week intervened in the foreign-exchange market directly and also increased the overnight lending rate to gain the weakening lira some power.

Underlining that an ongoing deterioration in global risk appetite, which began to be felt in August, has led to an excessive depreciation of the Turkish lira, the central bank report said that it would “not tolerate the outlook for medium-term inflation expectations being affected by these developments, and decided to widen the interest rate corridor via a significant increase in lending rates.” Başçı said the bank will keep inflation at a relatively lower rate in the middle run. Başçı highlighted that year-end inflation figure could have been as much as six points higher than expected “had the bank not taken action in the face of fluctuations in currency rates.” An earlier statement from the bank said Wednesday’s announcement would “significantly boost the value of the Turkish lira”. It happened fast. One US dollar was traded at TL 1.78 at the beginning of the day and fell to TL 1.75, with TL climbing to its strongest level against the dollar since early September. “The lira, as with many other emerging-market currencies, has come under intense selling pressure in recent weeks, as fears of a slowing global economy and escalating eurozone debt worries led investors to fold their bets in emerging markets,” the bank’s inflation report read on Wednesday.

“Our active implementation of policy rates will continue to maintain price stability and financial stability. We will take every necessary measure to keep prices stable,” Başçı told Wednesday’s press conference. The Turkish Central Bank has estimated that year-end inflation would hover between 7.8 percent and 8.8 percent, with a mid-point of 8.3 percent. Previous expectations for year-end 2011 stood at between 5.9 percent and 7.9 percent with a mid-point of 6.9 percent. The central bank’s governor attributed the revised inflation expectations for the next couple of months to the recent weakening of the Turkish lira and base effects on the prices of processed food items. “But we will not allow it to effect our medium-term inflation expectations and outlook,” he said. Başçı said inflation expectations for year-end 2012 would stand between 3.7 percent and 6.7 percent with a mid-point of 5.2 percent, adding the bank expected that inflation would stabilize at 5 percent after 2013.

Benoit Anne, head of emerging markets research at Société Génerale identified the Turkish Central Bank’s move as “hawkish” on Wednesday. “I would say it’s a strong policy response from the central bank and is a clear shift to a more hawkish stance,” Anne said. “The tone to me was much stronger than expected in terms of policy direction. I now see the Turkish lira performing more strongly and local rates moving higher.”

Süleyman Yaşar, former vice president of the Privatization Administration (ÖİB) told Today’s Zaman in a phone interview that the central bank is reacting very well to domestic and external developments. “There are many other banks that admire the Turkish Central Bank’s ability to anticipate and take the necessary measures against problems in the markets,” he said. Yaşar said some groups have tried to put pressure on the central bank to increase borrowing interest rates, but the bank has made “sound decisions” to avoid further fluctuations in markets. “Look, these financial circles have argued for as long time that the central bank should borrow liquidity, but the bank would not have sold foreign currency had they been in need of money reserves.” Recalling that the lending interest rate was increased to 12.5 percent while the borrowing rate is staying at 5.75 percent, he said the central bank “is narrowing the maneuvering room for speculators,” who would love to make big gains out of money they lend to Turkey.

Mentioning the pressure on inflation, Yaşar said the same problem has been experienced in other emerging markets, and that the high inflation rates could be temporary, in line with the declining global demand. “The recent increase in the private consumption tax (ÖTV) on certain products was necessary. …this may have led to a slight decline in demand but we need an active market.” The latest statements from the government support this idea. Finance Minister Mehmet Şimşek reiterated Wednesday that the state budget for 2012 aims to increase employment, economic growth and savings, as well as strengthening fiscal discipline and decreasing the current account deficit (CAD). Yaşar said both the central bank and the government should monitor developments in the eurozone closely, and position themselves accordingly against possible external shocks.

European leaders met Wednesday in Brussels to solve the debt crisis. The EU summit is considering plans to boost the 440 billion euro ($600 billion) bailout fund, by offering government bond buyers insurance against possible losses and attracting capital from private investors and sovereign wealth funds.

Strategist Selim Işıklar of Info Investment joined Yaşar in saying that he “has full confidence in [the central bank’s] ability to manage the markets,” and added that the bank should be prepared against possible currency speculation. “There are some groups who are planning to gouge, and can negatively affect the local currencies by speculative buying and selling in such emerging markets as Turkey, Russia, China and Brazil. This is an ongoing trend, and I think the TL will lose some value due to such attempts in the near future,” he noted. According to Işıklar, any current increase in the value of TL against foreign currency will be limited. “I guess the central bank will work to keep the TL at about 1.7 against the US dollar. …a possible gridlock in solving the eurozone’s problems might accelerate the devaluation of the TL again in the coming months.” Turkish markets are still vulnerable to external shocks.





26 October 2011, Wednesday / TODAY’S ZAMAN, İSTANBUL