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Turkish central bank vows tough action to stop currency tumbling

Source: Reuters - Tue, 28 Jan 2014 18:01 GMT
Author: Reuters
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* Basci vows lasting tightening if needed

* Says bank free of political interference

* Lira firms from lows, cost of insuring Turkish debt drops

By Nevzat Devranoglu

ANKARA, Jan 28 (Reuters) - Turkey's central bank governor raised hopes of an emergency rate hike on Tuesday in the face of opposition from Prime Minister Tayyip Erdogan, denying he was hostage to political pressures and vowing to fight rising inflation and a tumbling lira.

Erdem Basci said the bank would not hesitate to tighten monetary policy in a "lasting way" if needed and asserted the bank's independence amid investor concern that it has shied away from rate hikes under pressure from the government.

Erdogan, keen to maintain economic growth ahead of an election cycle starting in two months, has been a vociferous opponent of the higher borrowing costs sometimes needed to bolster currencies, railing against what he describes as an "interest rate lobby" of speculators seeking to stifle growth and undermine the economy.

"Now if I make a statement about this issue, they will say I have interfered with the central bank. But I would like you to know that as always, I am against a hike in interest rates today," Erdogan told reporters, hours before the bank's emergency policy meeting.

"But of course I don't have the authority to interfere with the central bank ... the responsibility belongs to them."

Erdogan's stance on rates has left the central bank struggling to contain the lira's precipitous slide. Investor confidence has been damaged by a corruption scandal shaking the government, fears about a power struggle and the global impact of a cut in U.S. monetary stimulus.

Basci ruled out any imposition of capital controls, saying such moves were "not in our dictionary", and said the sort of tightening steps taken by the bank so far to support the lira were "way more effective" when backed by interest rates.

"In Turkey, politicians publicly criticise or praise central bank decisions ... I don't think it threatens the bank's independence," Basci told a news conference to announce the bank's quarterly inflation report.

"Nobody should have any hesitation that the central bank will use all available tools. The bank will not hesitate to take steps to make lasting tightening in monetary policy if deemed necessary," he said.

The lira firmed to 2.2591 against the dollar by 1750 GMT from 2.3120 late on Monday, having touched a record low of 2.3900 on Monday morning.

The cost of insuring Turkish debt meanwhile eased from Monday's 19-month highs, according to data from Markit.

The bank sharply raised its inflation forecast for the end of the year to 6.6 percent, heightening market expectations that it will hike rates at its first extraordinary monetary policy meeting since August 2011, the height of the euro zone crisis.

It is expected to raise its lending rate - the cost of its overnight loans to Turkish lenders - by 225 basis points to 10 percent, according to the median forecast in a Reuters poll of 31 economists taken on Monday.

The bank will announce the outcome of the meeting at midnight locally (2200 GMT).

WILL IT BE ENOUGH?

Erdogan congratulated the central bank last week after it left interest rates on hold, despite the lira's tumble, while his new economy minister came out a day before the meeting saying the bank should not hike.

"Stand firm, don't raise," the pro-government Yeni Safak newspaper said in its main front page headline on Tuesday, alongside a picture of Basci.

"The interest rate lobby based in London and New York virtually blackmailed the central bank yesterday, pushing the lira has high as 2.39 against the dollar," the paper said.

Thirty respondents in the Reuters poll, a wide sample of Turkish and international banks, forecast a rate hike, with estimates ranging from a rise of 125 basis points to 425. Only one forecast the bank would leave rates unchanged.

There was less consensus over whether such a move would be enough to stabilise the lira and tame inflation, with 12 economists saying yes and seven saying no, citing the need for structural reforms and political stability.

"A one-off rate hike - even an aggressive one - is one thing, a radical and irrevocable change in the conduct of Turkish monetary policy in an election year and when growth is slowing is quite another," said Nicholas Spiro, head of Spiro Sovereign Strategy in London.

The graft scandal, which triggered the resignation of three ministers and detention of businessmen close to Erdogan, has grown into one of the biggest challenges of his 11 years at the helm, just as he prepares for local elections in March and a presidential race he is expected to contest five months later.

His reaction, purging the police force of thousands of officers and seeking tighter government control over courts, has been criticised by the European Union and raised investor concern over the rule of law and independence of state institutions.

Reluctant up to now to make an outright rate hike, the central bank has struggled to defend the lira instead by burning through its forex reserves and trying to squeeze up borrowing costs on the margins - a battle it has clearly been losing.

The bank raised its mid-point forecast for year-end inflation to 6.6 percent from a previous forecast of 5.3 percent, well above its target rate of 5 percent.

Basci said inflation would slow from the second half of 2014 and forecast the 2015 inflation mid-point at 5 percent.

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