Turkish president’s jab at Central Bank stirs markets, politics

ANKARA

Hürriyet Photo

President Recep Tayyip Erdoğan’s continued harsh criticisms of the Central Bank have raised concerns about the future of its governor, Erdem Başçı, as well as Deputy Prime Minister Ali Babacan, both of whom are widely respected among global market players. Speculations about the possible resignation of both Başçı and Babacan have stirred markets for the last two days, despite the denials from several authorities.

A lengthy meeting between Prime Minister Ahmet Davutoğlu and Deputy Prime Minister Ali Babacan late on Feb. 25 raised speculations that Babacan had resigned from his post after Erdoğan continued his criticism of the Central Bank. Many market and political actors found the long, unscheduled talk between the two worrying, coming after Erdoğan directed some of his toughest criticisms ever at Başçı.
 
On the afternoon of Feb. 25, the president questioned whether the Central Bank was under “external influence,” repeating that its interest rate policy was “not suitable” for Turkey’s economy.

His comments, a day after the Central Bank cut its key one-week repo rate by 25 basis points, triggered a fall in the Turkish Lira to 2.4800 against the dollar, from 2.4670 beforehand.

“Don’t take a stance against us using the cover of independence,” Erdoğan warned the bank in a speech in Ankara. “If you do so, we may ask whether some place is exerting an influence on you.”

Babacan and Davutoğlu held a lengthy meeting after these comments from Erdoğan. However, state-run Anadolu Agency reported that the two discussed the latter’s upcoming visit to New York, where he is expected to meet financial and investment circles as part of the second leg of an investors’ conference held in London in January, as well as some other issues, citing anonymous sources from the prime minister’s office.

The first announcement to ease the heated speculation came from Energy Minister Taner Yıldız, who ruled out such resignations early on the morning of Feb. 26.

“Such a thing is out of the question,” Yıldız said during ongoing debates on the controversial government-led security bill at parliament’s General Assembly.

However, Turkish assets opened weaker under high pressure on Feb. 26, despite Yıldız’s denial of Babacan’s possible resignation. Reports that Başçı had been out of the office for the last two days also contributed to the febrile atmosphere among market observers.

Over the last two days the lira has lost around 2 percent against the U.S. dollar, while emerging market currencies have gained 2 percent, according to Reuters data.

Meanwhile, an official from Davutoğlu’s office also strongly denied rumors that Babacan and Başçı had resigned later on Feb. 26, Reuters reported.

Central Bank spokesperson Yücel Yazar claimed that Başçı had been out of the office for health reasons, and he would back to the office by Feb. 27.

After these two announcements, Turkish assets then eased into positive territory, but this was mainly helped by general upbeat emerging market sentiments.

The fate of Babacan and Başçı are seen as being very closely linked. It was Babacan who proposed Başçı as head of the Central Bank, and he is also Başçı’s main defender in cabinet against other ministers’ unrelenting criticism of the Bank’s monetary policy.

“If Babacan or Başçı are forced out by others I think the market reaction would be severe and brutal,” Timothy Ash, the head of emerging markets for Standard Bank in London, told Reuters, predicting that it would prompt Fitch and Moody’s to consider ditching Turkey’s investment grade rating.