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ANALYSIS-Turkey bank chief seen bucking Erdogan to save reeling lira

Source: Reuters - Tue, 28 Jan 2014 16:41 GMT
Author: Reuters
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* Central bank expected to announce rate hike at midnight

* Governor Basci torn between political and market pressures

* Former academic fond of experiments, risked credibility

* Turkish lira has fallen to record lows to dollar

By Alexandra Hudson

ISTANBUL, Jan 28 (Reuters) - 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 seemed a model of stoic reserve on Tuesday, arguably the toughest day of his tenure.

Facing him in the morning was a front-page headline "Stand firm, don't raise" in Yeni Safak, a paper close to the government, ahead of an emergency policy meeting on Tuesday night, called as the lira plunged to unprecedented lows.

Pressure of a different kind came a few hours later as he calmly and politely fielded questions from critical international analysts and the press, insisting the central bank had the resources and strategy to overcome the biggest bout of volatility in Turkey's markets in a decade.

A rate hike appears exactly what the 47-year-old, his back against the wall, will be forced to do, risking Prime Minister Tayyip Erdogan's wrath just a week after winning his praise by holding rates and offering some complex tinkering instead.

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

Erdogan's government has condemned rate increases as pandering to an "interest rate lobby" of foreign investors and harmful to economic growth, creating a political climate in which those calling for rate hikes are left feeling like enemies of the state.

"It is the same sort of script. The central bank sees rate hikes as the last resort and drags its feet," Murat Ucer, an analyst at Istanbul-based investment consultancy Global Source Partners, told Reuters.

"This is the right move now - belatedly."

The results of the bank's emergency meeting will be announced at midnight (2200 GMT). Basci's reputation hinges on whether he can do enough to halt a rout of the lira and restore some faith in the bank.

Alarmed investors have fled Turkish assets as a high-level graft case engulfed figures close to Turkey's government, hastening an exit that followed curbs in U.S. monetary stimulus.

Erdogan has launched a purge of the judiciary and police in response to the corruption probe, testing investors' faith in the independence of state institutions and adding to pressure on Basci to show that the bank does not bow to politicians.

Former academic Basci has seen his name become so synonymous with opaque, elaborate monetary policy since taking the helm in 2011 that some analysts speculated the midnight-hour announcement heralded yet more monetary black magic.

But during a presentation of the bank's quarterly inflation report earlier on Tuesday, Basci made clear he would take decisive action to fight rising inflation and a tumbling lira.

"Actually I think this is about a return to orthodoxy for now. Basci is not planning anything spooky tonight. He made his life easier by saying he is hiking and he won't impose any capital controls," Ucer said.

BAFFLING BASCI

Basci took charge as Turkey emerged from the global financial crisis and faced dizzying growth rates and a rush of speculative 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.

To deter destabilising flows of speculative money into Turkey, Basci created a wide "corridor" between the rates at which the central bank borrows and lends in the overnight money market, and manipulated funding costs inside the corridor.

The result has been one of the world's most complex monetary policy mixes, often to the frustration of economists who have at times accused him of trying to do too much in too complex a way.

The bank is now 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. Yet questions remain about how long it would leave a higher rate in place.

"I don't believe for one second that the central bank will fully jettison its unorthodox monetary policy," Nicholas Spiro, head of Spiro Sovereign Strategy in London, said of Tuesday's late-night policy meeting.

"This is not a central bank which is prepared to give investors everything they've been clamouring for: conventional and aggressive rate hikes, a transparent and credible monetary policy and, crucially, a firm commitment to mount an interest rate defence of the lira come what may."

Central bank insiders describe a highly centralised decision-making process around Ankara-born Basci, who is surrounded by monetary policy committee members also largely from academic backgrounds and reluctant to challenge him.

Ideologically close to Erdogan's Islamist AK party, he was a childhood friend of Deputy Prime Minister Ali Babacan, seen by international investors as one of the more trusted members of the government's economic team.

His wife wears the Islamic head scarf, possibly one of the reasons why he didn't get the governorship in 2006 when he was vetoed by Turkey's staunchly secular then-president.

Basci taught in Turkey and Britain before becoming central bank deputy governor in 2003.

In January 2013, the 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.

His policies have been a radical response to the boom-bust cycles that plagued Turkey in past decades, but have removed some of the traditional certainties of central banking, such as the idea that rising inflation should be met by higher rates.

"Basci was over-confident and experimental but Turkey has not solved its inflation and current account problems. It was not ready for such experimental policies. On the contrary it needed a more orthodox hand," said Ugur Gurses, a former central banker and newspaper columnist. (Additional reporting by Asli Kandemir and Seda Sezer; Editing by Peter Graff)

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