Turkish central bank governor makes bold play

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Torn between an angry prime minister railing against an interest rate hike and punitive markets baying for a rise, Turkish central bank governor Erdem Basci opted for a bold increase in rates that stunned investors.

On Tuesday morning, Basci faced a front-page headline “Stand firm, don’t raise” in Yeni Safak, a newspaper close to the government, ahead of an emergency policy meeting.

A few hours later, he calmly fielded questions from critical international analysts and the press, insisting that the central bank could overcome the biggest bout of volatility in Turkey’s markets in a decade.

And shortly after that, Basci risked Prime Minister Tayyip Erdogan’s wrath by putting up interest rates dramatically in a move that spurred the lira to its biggest jump in five years.

In one of the world’s most unorthodox policy mixes, the bank had been battling to support the weak lira with foreign exchange auctions, liquidity adjustments and verbal intervention while avoiding outright rate hikes.

Erdogan’s government has condemned rate increases but yesterday Basci was being congratulated for bold action that also averted a domino crisis in emerging markets.

“The policy response to severe financial stability risks was punchy, aggressive and credible. An amazing job overall,” said economist Benoit Anne at Société Générale.

“The Central Bank of Turkey is now back in the game after going through a few tough weeks during which its credibility was heavily challenged.”

Many Turkish newspapers used pictures of Basci looking determined, his fists clenched.

“Hawkish step from Basci,” said Milliyet, with a cartoon of the governor as a weight lifter. “The central bank pulled out its interest rate gun,” said the daily Taraf.

Basci took charge as Turkey emerged from the financial crisis and faced dizzying growth rates and a rush of hot money. Highly respected for his prodigious command of academic theory, he viewed himself as a maverick central banker experimenting with policy tools often untested by more orthodox peers, according to those who have worked closely with him.

A year ago, London-based magazine The Banker named him central bank governor of the year, saying the bank “had moved ahead of other emerging markets” in designing steps to cope with volatile international capital flows. – Reuters


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