Turkish Central Bank Governor was chosen Central Bank Governor of the Year for Emerging Europe 2012


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The Turkish central bank’s unorthodox monetary policy was initially criticized but now it is increasingly hailed as a success

The unorthodox monetary policy put in place by the Turkish central bank was controversial but has gradually earned praise for its governor, Erdem Basci, as time has passed.

In late 2010 and early 2011, Turkey cut interest rates and raised banks’ reserve requirement ratios to combat inflation by curbing credit growth while trying to fend off capital inflows by depreciating the currency.

The bank also resorted to adjusting overnight lending rates, one-week repo rates and currency intervention among its unorthodox policy measures as part of a strategy to shift growth from a domestic demand-driven to an export-driven model.

Eric Curiel, strategist at Esemplia Emerging Markets, an equities manager, says Basci had pushed through his “unorthodox” policies in the face of scepticism. “We have seen the economy accelerate nicely, and the current account deficit has narrowed, and the lira has been pretty well behaved,” he says. “This is testament to the fact that he has done a really good job.”

One result of the policy was a jump in inflation. In 2012, inflation spent the first half of the year in double digits and twice the bank’s 5.5% target, but fell to single digits in June and July.

Michael Ganske, head of emerging markets research at Commerzbank, praised the central bank’s decision to accept relatively high inflation and a current account deficit. “They didn’t tighten policy, and that’s why they ended up with 8.5% growth. From a long-term perspective you would expect Turkey to get hammered, but they didn’t. The central bank did a very good job.”

Gaëlle Blanchard, emerging markets economist at Societe Generale, says the unorthodox policy worked, as the central bank managed to cool credit growth while keeping the currency under control.

Murat Ulgen, HSBC’s chief economist for central and eastern Europe, says Basci engineered a “new equilibrium on inflation prospects, financial stability and the exchange rate.

“I would say it is going well, partly because of monetary policy and partly because of structural reforms and partly because of the confidence that is provided by stability of policymaking,” he says.

David Lubin, head of emerging markets economics at Citi, says that while it might seem “odd” to give an award to a central bank that failed to meet its inflation target, the currency depreciation had given Turkey a competitive gain. “To its credit, the bank has captured the mood of central banks globally: it may not make sense to be too rigidly committed to pure inflation targeting in a world full of threats,” he says. However, he adds that a “clearer communication” of their objectives might have been welcome.

Blanchard says that Turkey needs to make structural reforms, which are more of a long-term issue, and warns that “a big boom in domestic demand would derail the train again.”

“[The policy] has been successful,” Blanchard adds. “Will it last? Politically it’s difficult to push too much on the demand side. The slowdown is not a hard landing so far; it’s a soft landing

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