Babacan defends Turkey rates stance

By:
Dominic O’Neill
Published on:

Ali Babacan, the Turkish government’s economy and finance chief, has defended attacks against the local financial sector during protests stemming from the redevelopment of Istanbul’s Gezi Park.

The deputy prime minister for economic and financial affairs is widely respected in the financial community and is usually seen on a more conciliatory side of the ruling AKP, gravitating towards president Abdullah Gul.

However, in an interview with Euromoney in Ankara, Babacan justifies prime minister Recep Tayyip Erdogan’s attacks against what he calls an “interest-rate lobby”.

“The suspicion with us is that there have probably been some institutions, together with some individuals, trying to increase the risk perception of Turkey, to increase real interest rates,” says Babacan.

He also defends an investigation in which local banks and brokers have had to hand regulators all records of communication with foreign investors during the anti-government protests this summer.

“What was happening around those weeks of the Gezi Park events [was that] individuals in Istanbul, some individuals in London and elsewhere in the financial community started to emit some disinformation, some misinformation about what was going on in Turkey,” says Babacan.

Ali Babacan, Turkey's economy and finance chief; Photo: World Economic Forum
“People were saying that there is a civil war in Turkey, or disinformation, like: ‘People are now in lines, in queues, in front of the banks, withdrawing deposits.’

“All these [...] disinformation efforts caused a lot of discomfort on our side, because there was a big discrepancy between what was going on, versus what was being told to some market players, to some investors.”

Erdogan previously lashed out against high rates in 2012, after central bank governor Erdem Basci increased rates to ward off a ballooning current-account deficit, rising inflation and a weakening lira.

During the protests this summer, which coincided with wider emerging-market fears of Fed tapering, investors dumped Turkish assets. Erdogan’s rants against the “interest-rate lobby” returned with a vengeance.

Basci – a school friend of Babacan and seen as a government sympathizer – says his monetary policy, which has seen negative or almost zero real rates, is designed to counter destabilizing hot-money flows.

However, as global rates inch higher, the IMF said in September Turkey’s central bank should tighten rates to tackle a high current-account deficit driven by a consumer boom, and largely financed by international portfolio funding.

Basci kept benchmark rates on hold in his monthly monetary policy announcement on Wednesday, including the one-week repo, which the IMF thinks he should tighten.

Babacan cites measures announced on September 30, such as new reserve requirements for consumer-credit companies, and hikes to minimum repayments, credit limits and risk weightings on credit cards.

He says Basci has increased lending rates to counter changes in external risk appetite. “The effective average lending rates of our central bank increased significantly over the last three or four months,” says Babacan.

See Euromoney magazine’s November edition for the full report of the interview.