With President Recep Tayyip Erdogan bearing down on him over interest rates, Turkish central bank Governor Erdem Basci is now at risk of alienating investors who want to see evidence of greater autonomy on policy.
Basci’s decision to tie holding an emergency interest-rate meeting last week to the outcome of an inflation report caused “tremendous damage” to the central bank’s credibility, according to Societe Generale’s Benoit Anne. The move made “everyone uneasy,” said Commerzbank’s Simon Quijano-Evans.
While the “interim” policy meeting, as it was later rebranded by Basci, was cancelled last Tuesday after consumer prices didn’t fall the required amount, some analysts saw his willingness to hold a special review as bending to government pressure to cut borrowing costs. Yields on two-year notes jumped the most in 19 months the next day, with the lira falling to a record, after Erdogan questioned the wisdom of maintaining the central bank’s independence.
“Governor Basci has a tough job, he’s stuck between the market and President Erdogan,” Anne, head of emerging-market strategy at Societe Generale, said Thursday by e-mail. “Investors don’t like political pressure on central banks and they blame Basci for coming across as excessively dovish.”
Central bank spokesman Yucel Yazar declined to comment for this story when he was contacted on Thursday by phone.
Consumer-price inflation slowed to 7.24% in January, missing by seven basis points the 1 percentage point reduction Basci required to convene the meeting. The median estimate in a Bloomberg survey of economists was 6.8%.
While core-inflation indicators continued to show improvement and the effect of oil-price declines on producer costs were sustained, the downward move was limited by exchange- rate developments, the central bank said in an assessment posted on its website Wednesday.
“This is a time when it is very important for central banks to be able to decide on their own,” said Quijano-Evans, Commerzbank’s head of emerging-market research. “Otherwise, the risk of currency overshooting increases, again blurring the picture for policy.”
Erdogan has repeatedly called for lower borrowing costs to support economic growth even as the central bank cut the benchmark rate by 50 basis points to 7.75% last month. He said last Wednesday making lower rates dependent on slowing inflation is the result of the “wrong mentality.”
“Unfortunately, this is the point we come to when the institution is independent,” Erdogan said.
The benchmark one-week repurchase rate has been lowered by 225 basis points since Basci last held an emergency meeting in January 2014, when it was more than doubled to 10% to arrest the lira’s slide. The next scheduled meeting of the bank’s monetary policy committee is on February 24.
“Basci has been quite smart, linking his decision to the inflation data,” Guillaume Tresca, an emerging-market strategist at Credit Agricole in Paris, said by e-mail on Thursday. “For two decimals, he decided not to cut. It gives a little bit more credibility to the” central bank, he said.
Erdogan’s call last week for a cut in central bank rates isn’t leading to lower bond yields. Two-year government note yields climbed 115 basis points last week, the biggest weekly increase since July 2013. They fell to 6.69% on January 28, a 19-month low, as investors anticipated a reduction in rates. Turkish local-currency bonds returned 8.9% last year, the most in Eastern Europe, according to the Bloomberg Emerging Market Local Currency Sovereign Index. They have lost 2.1% this year, in line with the regional average.