How Turkey’s former central bankers would dodge a crisis

ANKARA (Reuters) – Veterans of Turkey’s central bank have some advice for today’s policymakers, who are on the frontlines of Ankara’s unorthodox battle against a record-low lira and the economic impact of coronavirus: raise interest rates now and get back to basics.

Four former policymakers, including a governor, told Reuters the bank must win back some credibility by moving to wrestle inflation down to target for the first time in nearly a decade.

The first step in heading off a possible crisis, they said, is setting aside back-door policy tools and using a meeting next week to formally raise the benchmark policy rate. That could slow a 20% drop in the lira which has put it among this year’s worst-performing currencies.

Analysts say a rate hike is unlikely, especially given President Tayyip Erdogan’s repeated calls for cheaper credit and the sacking last summer of the previous central bank chief for ignoring instructions.

Under new governor Murat Uysal, the bank slashed rates to 8.25% from 24% in less than a year, and has held them there since May.

“The trend is going toward a one-man rule, so talking about central bank independence is absurd right now,” said Bulent Gultekin, governor in 1993 and now a professor at The Wharton School in Philadelphia.

“The central bank cannot alone reform overall Turkish economic policy. But in the meantime they can gain some time by raising rates to ensure, for now, there is no panic.”

The bank did not immediately comment. Governor Uysal has previously said the bank has policy independence and that policy is in line with projections that inflation will soon start to slow.

(Graphic: Rate cuts left inflation lofty –


Turkey’s currency touched an all-time low this week beyond 7.5 per U.S. dollar, keeping imports expensive and inflation near 12% despite a sharp economic slowdown due to the coronavirus.

Analysts say the selloff has laid bare the limits of Turkey’s costly interventions in FX markets to stabilise the lira. They calculate the central bank and state banks have sold some $120 billion in dollars since last year.

The interventions have played a role this year in nearly halving gross FX reserves at the central bank, which has also bought record amounts of government bonds to backstop Ankara’s fiscal response to the pandemic.

Hakan Kara, who was the bank’s chief economist until last year, said extraordinary tools such as interventions and tweaks to required reserves have been over-used and are now blunted.

“These should not be a substitute for the fundamental instrument, the policy rate,” he said, adding the bank needs to “break the spiral” of confidence among citizens and investors.

Only two of six economists polled by Reuters expect a rate hike next week, while they are split on whether one will come by year end.

Uysal has said policy reflects expectations inflation will soon dip and that reserves naturally fluctuate. Finance Minister Berat Albayrak — Erdogan’s son-in-law — has said the bank sometimes intervenes to stabilise the currency, and that exporters benefit from some depreciation.

(Graphic: Turkey’s depleted buffer –


This month the lira has held mostly flat, thanks in part to indirect steps to tighten credit that have raised average funding costs to 10.3% from 7.3% in two months.

Yet last week ratings agency Moody’s said Turkey is headed toward a balance-of-payments crisis and noted the central bank’s “unsuccessful attempts to defend the lira” have cut its buffer down to lows not seen in decades.

Fatih Ozatay, a central bank vice president from 2001-2006, said reserves would not be a problem if the lira were free-floating and economic policy was on the right track.

“If there is a need for fixing, it is not only the duty of the central bank,” he said. “I’d prefer a direct increase in the policy rate instead of raising the average funding rate.”

Another former policymaker, Ibrahim Turhan, who has since helped found the opposition Future Party, said the competence and independence of the bank has eroded since 2016 when annual inflation last dipped below 7%, near its 5% target.

“There can be no inflation without the central bank’s permission,” he said. “It has to regain its independence before anything else.”

(For a graphic of reserves, click here: For inflation and rates, click here:

(Reporting by Nevzat Devranoglu and Jonathan Spicer; Additional reporting by Ezgi Erkoyun; Editing by Catherine Evans)

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