The Central Bank governor’s final exam

The Central Bank governor’s final exam

Central Bank Gov. Erdem Başçı will hold his last Monetary Policy Board (PPK) meeting on March 23. Because of this, it is possible to regard the meeting as his last test. While markets are debating whether there will be an interest rate reduction, they will take into account this aspect as well. 

As a matter of fact, it is possible, but not likely, that Başçı will be reappointed to the post for five more years.

The reason for this is the widespread opinion that President Recep Tayyip Erdoğan does not want Başçı to keep the post. Actually, it is known that Prime Minister Ahmet Davutoğlu wanted to reappoint Başçı but couldn’t convince the president… This has been rumored for quite some time in Ankara.

We do know that Başçı was a close friend of former Deputy Prime Minister Ali Babacan and that the latter has been advising Davutoğlu in economic matters, but apparently the last say belongs to Erdoğan. It is already an open secret that the president has blocked, despite the insistence of the PM, the reappointment of Babacan as deputy PM. 

It has not been determined whether or not Başçı still has hopes for a reappointment. Market players do not even see a 1 percent probability of this; they have been talking for some time about a new person, but we do not know what Başçı is thinking.   

The follow-up question to this is, “Well, if Başçı has hopes, would he decide on decreasing the top level of the interest rate band which has been expressed via the president’s advisers?” Or in a different phrasing, we can ask the question as such: “If he reduces interest rates, will there be perceptions that he listened to the word of the president?” 

Opportunity to build up reserves 

Technically speaking, market players are saying that because of the abundance of global liquidity and the corresponding low foreign exchange rates, there could be a reduction of interest rates on the agenda, but in Turkey’s situation, this should not be considered. The reason is that in Turkey, inflation is still high and the foreign exchange reserves are quite low. In such a temporary period when global liquidity is in abundance, it is definite that the Central Bank will take this opportunity and reinforce its foreign exchange reserves. The U.S. Central Bank Fed postponed rate hikes, causing the abundance of liquidity, plus the expectation that instead of four hikes, only two hikes will be made; the overall effect of these two factors will not be permanent. Markets expect the Fed to hike rates in June. It is also a predominant expectation that the effects of the last decisions of the European Central Bank that caused the abundance of liquidity will not be long term. In other words, the abundance of liquidity is temporary, but it is not clear whether or not the low inflation trend is permanent; for these reasons, it is not the right time to reduce rates. 

For these reasons, markets share the opinion that the Central Bank should not lower the top level of the corridor. When we ask whether a reduction could be made despite this, we see that the number of those who are expecting a reduction even though it is wrong is quite a lot.  

We will see today how many points Başçı will receive in his last exam on the “independence of the Central Bank.”