More of the same at Turkey's central bank

By bne IntelliNews April 15, 2011

Justin Vela in Istanbul -

Deputy Governor Erdem Basci has been chosen to head Turkey's central bank, following the expiration of Governor Durmus Yilmaz's five-year term on Monday, April 18, newswires reported the presidency's press bureau as confirming. Despite being vetoed for the position when he was first nominated in 2006, Basci is a close ally of the ruling Justice and Development Party (AKP) and is likely to maintain market confidence.

Basci was forecasted to be appointed as the new central bank governor by 14 of the 19 economists surveyed by Bloomberg earlier this month. The central bank's deputy governor for the past eight years, Basci's duties included heading the marketing and research departments of the bank, along with formulating policy. TEB economist Selim Cakir says Basci proved that he worked well within the central bank bureaucracy and is liked and appreciated by his staff. "He is likely to follow sensible policies. Instead of a unknown party, he represents a continuation of the central bank's [previous] governors," Cakir says.

One of the key architects of the central bank's current unorthodox monetary policy, which has seen interest rates continuously cut and bank reserve requirements raised, Basci is likely to continue the policy mix, at least initially. In January, the central bank cut interests rates to a record low of 6.25%, while at the same time raising the amount of reserves that commercial banks must set aside for liabilities. The policy was meant to stem the inflow of short-term investments or "hot money" that had flooded into the country in the past year, while at the same time curbing lending that was contributing to a huge rise in domestic spending and a surging current account deficit.

Since the beginning of the year, the central bank has stuck with the policy, despite rising scepticism among international investors. However, with inflation set to rise towards the end of the year from an historic low of 4%, Basci is expected to raise interest rates in the second half of 2011. "We assume that the [central bank] moves towards policy normalisation in the second half of 2011, with four 25-basis-point rate hikes, and that this is followed by a further two 25-bp rate hikes in 2012," writes Timothy Ash of the Royal Bank of Scotland.

Second time a charm

Initially proposed for the central bank governorship by Turkish Prime Minister Recep Tayyip Erdogan in 2006, Basci's nomination was vetoed by then president Ahmet Necdet Sezer, a staunch secularist. While Basci was widely considered qualified for the job, his rejection appeared to be rooted in the fact that his wife wore a headscarf, a symbol of open piety in laicist Turkey.

The AKP at the time was being accused of trying to appoint religious allies to key positions of power. In the ensuing political battle, Sezer rejected another AKP nominee and markets trembled over the lack of consensus before Yilmaz was finally agreed upon as a compromise candidate. The five years of Yilmaz's tenure saw one of the most prosperous periods in recent history for Turkey. Although the country maintains stellar growth figures, especially in comparison to Eurozone countries, concerns remain as international investors watch the fight to reign in the current account deficit and rising inflation.

All eyes will be on Basci. With the AKP's Abdullah Gul having succeeded Sezer has president, Basci's nomination was quickly approved on Thursday, April 14, local media reported. Seen as a long-time AKP confidant, Basci was brought to the central bank in 2003 by his childhood friend Ali Babacan, Turkey's Deputy Prime Minister. Previously, Basci had served as an assistant professor of economics at Ankara's Bilkent University.

The close connection to the AKP might make some sceptical of Basci. "Critics argue that a key plank in the AKP's success in reining in Turkey's secular establishment has been its ability to infiltrate the establishment itself, extending to the police, security services, judiciary, tax inspectorate, media and capital markets board," says Ash.

However, TEB's Cakir plays down the possibility that Basci might allow the government too much influence over monetary policy, saying the central bank wouldn't give up its independence easily. "I see it unlikely that the government makes an appointment that will harm the independence of the central bank as it would remind [Turks] of the bad old days in Turkey," he says.

More of the same at Turkey's central bank

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