US embassy cable - 03ANKARA3488

UNCLAS ANKARA 003488 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, PGOV, TU 
SUBJECT: POLITICIANS PRESS CENTRAL BANK TO CUT INTEREST 
RATES 
 
 
REF: ANKARA 3319 
 
 
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. 
PEARSON