TODAY’S – Political noise over CB policies exposes rift in gov’t

Political noise over CB policies exposes rift in gov’tAs an ongoing political dispute regarding the central bank’s interest rate policy creeps over into the bank’s credibility as an independent monetary policymaker, different voices from the Cabinet have signaled a split in opinions over the issue.Prime Minister Recep Tayyip ErdoIan resumed his harsh criticism of the central bank’s policies on Tuesday, saying the central bank’s surprise interest rate cut last week, which followed a huge rate hike in late January, did not go far enough.

The comments from ErdoIan and other government officials have already added to concerns about government interference in monetary policy. Apparently, some key Cabinet members responsible for the economic agenda are not happy with this and have separately raised their voices.

On Tuesday, Deputy Prime Minister Ali Babacan said financial institutions should stick with the key principles of market regulations without conceding to pressure. Babacan added that management of the economy “should not fall into the trap of populism while making its decisions.

”Babacan was joined by Finance Minister Mehmet IimIek, who said on Wednesday that he “completely agrees with Mr Babacan.” IimIek appeared to defend the central bank, suggesting that the bank be left out of political discussions so it can do its job in a healthy manner, though Economy Minister Nihat Zeybeki said he does not think the bank has come under political pressure.

The two ministers were speaking in Istanbul.IimIek defended the central bank’s efforts to tame rising prices.

The finance minister stressed that the central bank’s credibility is vital to Turkey and that it should be backed in its efforts to tame rising prices. “I believe the central bank must be strong in its fight against inflation and we need to support it,” IimIek added.

Zeybeki, on the other hand, said he “understands why ErdoIan is worried about the central bank’s policies.”“We think interest rates are high, higher than the levels they should be at,” Zeybeki said, adding to recent government criticism of the central bank.

“Markets are pushing market interest rates down. The central bank should lead the market trend, not follow the market from behind,” Zeybeki said, arguing that high borrowing costs were contributing to rising inflation.

ErdoIan and Zeybeki’s view that high interest rates lead to inflation are contrary to the opinion of most economists, who argue that Turkey’s stubborn inflation is largely imported, driven by a weak lira and a heavy trade deficit.”The [Justice and Development Party] AK Party government have something of a bee in their bonnets about this.

Most economists, and central bankers, would argue that the causality is the other way around, but it does show the dominant thinking within the AKP,” said Timothy Ash, head of emerging markets research at Standard Bank in London, on Wednesday.The political noise over interest rates has undermined confidence in the central bank and added to pressure on the lira, which slipped to 21083 against the dollar by 0925 GMT from 20979 late on Tuesday.

Turkey’s 10-year benchmark bond yield rose to 935 percent from 923 percent at Tuesday’s close. The Istanbul share index rose 12 percent, outperforming the broad emerging markets index.

Last week the central bank cut interest rates for the first time in more than a year, unwinding some of January’s huge rate hike aimed at halting a dramatic slide in the lira amid an emerging market sell-off. ErdoIan, who has dominated politics for more than a decade and overseen a period of unprecedented growth, is keen to maintain his record on the economy ahead of an expected run in the country’s first direct presidential election in August.

“The question is whether commentary from ErdoIan and some of his ministers is just meant for domestic consumption and driven by the electoral calendar, or the sub plot is to actually pressure the central bank to cut rates,” Ash said.Zeybeki stressed on Wednesday that the government is not going to introduce a new law to change the role of the central bank amid rumors that ErdoIan, who is not happy with the central bank managers, wants to tighten his political grip on the bank.

ErdoIan said on Tuesday the government would “do what was necessary when the current central bank administration’s tenure is over”Governor Erdem BaII’s tenure will end in 2016. BaII, who kept a low profile and did not get into an open quarrel with ErdoIan, said last week the interest rates in Turkey need to be higher than in most world markets.

The latest political noise over his policies will show if BaII caves in to ErdoIan’s demands. BaII is expected to make a presentation on monetary policy to a Cabinet meeting presided by ErdoIan next week.

This will be his first presentation to the ruling government so far this yearMeanwhile, IimIek also said inflation was likely to peak this month, reinforcing expectations that the bank could again lower rates. But he also forecast inflation would top out this month, boosting expectations that the central bank might loosen policy again at its rate-setting meeting in June, which could leave Turkey vulnerable in the eyes of some investors.

“We have always viewed appropriately high interest rates (c.10 percent) as the necessary and sufficient condition for Turkey’s CAD (current account deficit) to remain reliably financed through coming years of progressively less easy monetary policy,” Commerzbank said in a note to clients.

“This defense worked, as expected, recently when the central bank hiked rates in an emergency meeting. But, this defense could be about to be dismantled,” said the bank, which recommended investors cut their exposure to Turkey in the coming week.

SOURCE: Today’s Zaman

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