Cablegate: Politicians Press Central Bank to Cut Interest

This record is a partial extract of the original cable. The full text of the original cable is not available.

281525Z May 03





E.O. 12958: N/A


1. (SBU) Government ministers continue to ratchet up the
pressure on the Central Bank to cut overnight interest rates,
arguing that such a move is needed to weaken the
recently-robust lira and prevent Turkey's growing current
account deficit from deteriorating further.

2. (SBU) The pressure began to rise last Friday, after the
Central Bank reported that the current account deficit had
reached 2.368 billion in the first quarter, compared to a
$479 million deficit in the first quarter of 2002. The
official target for the year is $3.5 billion. Shortly after
the Bank's announcement, Finance Minister Kemal Unakitan
predicted a rate cut "soon." Prime Minister Erdogan said he
was confident the Bank would lower rates, adding that a 3-5
percentage point cut (from the current 41 percent) would help
"balance" the exchange rate. "We hear the suffering of the
business world. God willing the Central Bank governor and
his team hear the sensitivity on this issue, and I think they
will take the necessary steps."

3. (SBU) On May 28, following a meeting with the visiting
IMF Mission Chief, Union of Chambers President Rifat
Hisarciklioglu publicly reminded politicians that the Central
Bank was an independent organization and should not be
pressured on interest rates. Such pressure, he warned, would
hurt Turkey's image in global markets. Industry Minister Ali
Coskun replied that the GOT was not interfering in the
Central Bank's business, but said he personally expected the
Bank to be "sensitive" and reduce interest rates further.

4. (SBU) State Minister Kursad Tuzmen, the always outspoken
advocate of exporters, issued the strongest statement so far
today. He urged the Bank to take steps immediately to weaken
the lira, warning that "independent bodies preserve their
independence by acting earlier, more actively, before their
independence becomes a subject for debate. That would be
craftsmanship, competence."

5. (SBU) Central Bank Governor Sureyya Serdengecti told us
last week (reftel) that the Bank would not stray from its own
measures to determine whether and when to lower interest
rates. Serdentecti defended the Bank's independence in a
speech to opposition CHP deputies today, reportedly saying
that "you don't cut rates just because the marekts expect it
or because there is political pressure to do so."

6. (SBU) Some market analysts are joining the call for
Central Bank action. HSBC argued that, since the strong lira
was putting downward pressure on inflation and inflationary
expectations were falling, there was a strong economic
argument for a rate cut, which in turn would allow yields on
government t-bills to fall. Other analysts said growing
expectations for a rate cut contributed to today's decline in
t-bill yields, with the benchmark 07/07/04 bill paying 48.76
percent, down from 50.15 percent Tuesday.

7. (SBU) Comment: Whatever the arguments for a rate cut,
this strong public, political pressure puts the Central Bank
in a bind. Should it decide to reduce overnight rates, it
will be hard pressed to convince observers that it is doing
so for economic reasons rather than in response to political
pressure. CB Governor Serdengecti is acutely aware of the
need to maintain credibility, and of how quickly he can lose
that credibility if markets begin to question his
independence and commitment to disinflation.

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