US embassy cable - 05ANKARA197

UNCLAS ANKARA 000197 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT:  Central Bank Inaugurates Monetary Board with 
Surprise Rate Cut 
 
 
1. (SBU) Summary: The Turkish Central Bank surprised 
markets January 11 by announcing a 1 percent rate cut 
decided at the first meeting of the Bank's newly-created 
Monetary Board January 10.   Analysts were surprised by 
the timing of the cut, and took it as a sign of increased 
Central Bank confidence in ability to meet its 2005 
inflation targets.  The decision also drew attention to 
the Bank's new Monetary Board, the creation of which is a 
significant step towards transparency and predictability, 
as well as toward the goal of formal inflation targeting 
in 2006.  End Summary. 
 
2.  (SBU)  In its very first meeting, the new Central 
Bank Monetary Board (see below) announced a 100 bps rate 
cut, bringing its simple annual overnight borrowing rate 
from 18 percent to 17 percent (18.5 percent on a compound 
basis), while cutting its lending rate from 22 percent to 
21 percent.  The cut took markets and analysts completely 
by surprise: having most recently cut the rate by 200 bps 
on December 20, few analysts thought recent economic 
indicators provided sufficient justification for another 
rate cut so soon.  Favorable December inflation data and 
a Central Bank expectations survey predicting yearend 
2005 CPI inflation of 8.4 percent seem to have weighed on 
the Bank's thinking. 
 
3.  (SBU)  The announcement drew attention to the newly- 
created Monetary Board, which decided the cut at its 
inaugural meeting January 10.  As Central Bank Governor 
Serdengecti announced while announcing the 2005 monetary 
and exchange rate program on December 20, Board will meet 
regularly on the 8th of every month (unless the 8th falls 
on a weekend).  While the Board will play an advisory 
role in 2005, it will take on formal decision-making 
powers in 2006.  In his remarks, the Governor pointed out 
that this was a move--encouraged by the IMF-- towards 
being more transparent and also towards formal inflation 
targeting, which he announced would begin in 2006. 
 
4.  (SBU)  Citigroup analyst Olgay Buyukayali wrote today 
that while the Bank's decision was a surprise, it was a 
clear demonstration that the Bank was uncomfortable with 
ex-ante real interest rates of 10 percent.  Monetary 
Board Member Guven Sak told Econ Specialist that despite 
the lack of significant new economic developments to 
support a new rate cut, the Board wanted to signal a new 
start for the implementation of monetary policy.  He 
added that the Central Bank felt it had room to lower 
rates and decided to be pro-active this time. 
 
5.  (SBU)  The market's immediate reaction was to drive 
the rate on the benchmark government bond (05-07-06 
maturity) down from 20.7 percent to 20.2 percent on a 
compound basis.  Toward the close of business, this rate 
came down to 20.09 in next-day settlement trading. 
Despite the rate cut, the TL appreciated slightly against 
USD at first, but later moved back toward yesterday's 
trading levels.  The TL/USD fixing rate was 1.3803 at the 
end of the day, with the TL appreciating 0.62% on the 
day.  The equity market closed the day up almost 2 
percent.  Demand was strong in the first New Turkish Lira- 
denominated FRN auction the Treasury held January 11, 
with a better than expected net sale of 1.8 billion new 
Turkish Lira (USD 1.3 billion). 
 
6.  (SBU)  Comment:  The Central Bank certainly succeeded 
in drawing attention to its new framework for monetary 
policy decision-making.  Just as the rate cut was a 
signal of the Bank's confidence in the robustness of the 
economic recovery, it was also and a step toward more 
transparent, modern monetary policymaking. 
Edelman