Turkish Central Bank head ‘warns’ Fed to keep promises

Turkish Central Bank head ‘warns’ Fed to keep promises

DENIZLI - Reuters
Turkish Central Bank head ‘warns’ Fed to keep promises

Turkish Central Bank Governor Erdem Başçı says Turkish lira can strengthen to 1.8 against the dollar next year if capital flows strengthens. AA photo

Turkish Central Bank Governor Erdem Başçı has urged the U.S. Federal Reserve to stick to its word on the procedure for ending a stimulus package that is expected to heavily affect Turkey.

“It is not so important whether the Fed starts tapering next month, what matters is that it has been priced in,” the governor said yesterday in the western city of Denizli. “If the Fed starts actual tapering and does exactly what it said, it will have no impact on markets.”

Financial markets have already been priced in the bulk of the impact of a reduction of U.S. monetary stimulus and Turkey’s lira should soon recover, central bank governor Erdem Başçı said.

Turkey has been among the most high-profile victims of the shift in global capital prompted by signals the Federal Reserve would rein in its ultra-easy monetary policy and the lira gained sharply when the U.S. central bank surprised by holding fire on an actual cut in bond-buying last week.

No change in interest rates in short term

Başçı reiterated his faith that he would not need to raise interest rates in the short term to defend the currency, having spent a fifth of the bank’s reserves to prop it up since May.

But he did say the lira’s fall had worsened the outlook for inflation and that the bank would implement additional monetary tightening in its complex money market operations if there were risks of price growth getting out of control. The Fed’s decision last week gave Başçı some breathing space but economists are skeptical of whether the lira’s 15 percent fall since February is at an end given the pressure of global flows and Turkey’s huge current account deficit.

The bank has sold more than $9 billion of its roughly $50 billion in readily available foreign currency reserves in the past three months, raising questions about its ability to resist another attack.

Başçı said the lira was unjustifiably weak and said inflation would be higher than the bank’s previous forecast - an argument for more action.

“We are below the 110 point mark in the real effective exchange rate, at an excessively weak level for the lira, but it will recover under these market conditions,” he said.

“If the lira/dollar rate had remained at 1.92, we could have achieved the 6.2 percent inflation at year-end, but we think it will be somewhere between 6.2 to 7.4 percent due to lira weakness.” 

With an election cycle starting next March, Turkish Prime Minister Recep Tayyip Erdoğan’s government is eager to maintain robust economic growth and the central bank has been cautious not to jeopardize that by raising rates. 

“We think that Başçı is trying to finely balance the need to keep the lira stable against his inability to raise rates,” analysts from Commerzbank said in a note. “FX sales become the only tool but this costs reserves too. And core-inflation is accelerating, so such a moderate strategy may not work for very long,” it said.

Başçı said the lira could strengthen to 1.8 against the dollar in 2014 if capital flows strengthened, or if not it could return to around 1.92.

He said a gradual improvement in the current-account deficit, which economists say is at the heart of the lira’s weakness compared to other emerging market currencies, would continue, excluding gold.