What Do CB Turkey Governor Basci & Almodóvar have in Common?
I wasn’t there, as I am not a market economist, and so was not invited, but I did read several reports on the Central Bank of Turkey’s, or CBT’s, meeting with economists yesterday (BTW, I think these townhall meetings are a great! idea), and I did talk to an economist friend who was there. The impression from the CBT’s presentation, the reports and my friend was that Governor Erdem Basci’s speech had all the ingredients of an Almodovar movie: Passion, mystery, comedy, drama and intrigue.
Comedy: Basci introduced one of the members of the MPC as the hawk inside the MPC; the guy’s last name is Sahin, which translates as “hawk”:) Abudllah Yavas, another new MPC member, then asked him not to translate his last name, which means “slow”:) Yep, we Turks have weird last names; mine means “crazy dervish”- I don’t know about the dervish part, but I am one crazy …beep….
Passion: The Bank passionately believes that inflation is in line with its end-year forecast. But according to my friend who was there, Basci did not give a convincing explanation of his confidence on inflation, other than vague statements like exchange rate pass-through would be less than in 2006 because there is more competition now and firms are less able to pass the depreciation on to their prices. That may well be the case, but I would have preferred to see a CBT working paper to that effect… The lack of evidence supporting their arguments, and their communication in general, is my main criticism of the CBT, which I mentioned in last week’s column, and one which I will take on in detail in an upcoming post.
Drama: The Bank is saying that the current account deficit would improve in the last quarter due to base effects. This is what I had been saying as well, in reply the Bank’s claims that its policies would control the deficit in the last quarter. The Bank says it already mentioned this in the latest Inflation Report, and I take their word for it, but they have tied this to policy way too many times as well. The policy arguments seems to have disappeared for now, making way to another argument: The Bank does not see the deficit at 5 percent anytime soon, highlighting that that the current account deficit is also closely linked to the Fed’s balance sheet.
Mystery: Basci has stated that that the CBT has many tools that are less costly and even “costless” for banks. He also said they did not want to mention these tools at this meeting, but could announce them if there is need. I have no [beep] clue what these tools are, so if you do, please let me know in a comment under this post.
Intrigue: The Bank claims that the recent increase in the share of non-resident ownership in Treasuries, during global uncertainty due to Eurozone debt concerns and weaker global economic activity, shows investors’ confidence in its inflation-fighting credentials. Really interesting take, as I would think it would reflect two different things: 1. The increase in risk-taking of late; there may be uncertainty, but EFPR data do show an increase in flows to all EMs of late. 2. If the Central Bank will really not increase rates for the rest of the year, Treasuries look very cheap! Neither of these has anything to do with inflation-fighting credentials.
In fact, the single big theme I got from reading the presentation & analyst reports and talking to my friend is that the Bank is openly saying that not only it does not plan any rate hikes, it does not see a need for further required reserve ratio, or RRR, hikes, either. In other words, Basci was saying, “read my lips, no tightening in monetary policy”. This is the main scenario outlined in my Hurriyet Daily news column last week as well. Well, I hope his lips are not like those of Papa Bush… Basci supported this policy with the usual arguments: The economy is cooling down (he noted they expect the seasonally-adjusted growth of 0 percent in the second quarter), global growth is weak, credit is slowing down, etc etc…
But if European debt concerns, or global growth, or something else would decrease capital flows, Basci is saying they would narrow the interest rate corridor to encourage capital inflows, reversing the policies of late last year:
Please note that the title of my graph is paying homage to one of my favorite Almodovar movies 
Anyway, Basci also noted they would decrease FX auctions, as they did last week, which would not only slow down lira depreciation, but also decrease the need of further RRR hikes.
By the way, I am really looking forward to Almodovar’s latest. Reunited with Antonio Banderas after all these years. BTW, I had learned in my Spanish classes that there was a gossip in Spain in the 80s that the young actor Bandereas and Almodovar were lovers. Not that there is anything wrong with that….
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