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Turkey: Just what is Basci up to?

The Turkish central bank governor’s unorthodox policies have riled, muddled and, say some, outsmarted markets. He thinks they work. But is he trying to do too much with so many different instruments and targets?

Erdem Basci, Turkey's central bank governor
Erdem Basci, Turkey's central bank governor

Everyone recognizes Turkey’s challenges with hot-money flows, especially over the past two years. Just last month, for example, the central bank governor noted a "re-acceleration in capital inflows". But the central bank governor’s unconventional policies and multiple targets to deal with this have brought hostility, confusion and praise. "He’ll either win the Nobel Prize or it’ll end in tears," was the verdict of a prominent emerging markets economist on Erdem Basci’s policies. The prediction was for the latter. By late April, neither of those things had happened.

In the first part of 2013, in fact, Basci has continued in the same direction, surprising outsiders by trying to cool the market, not by an old-fashioned hawkish monetary policy, but by rapidly lowering rates and simultaneously increasing cash-reserve requirements – policies that would usually be seen as contradictory. Albeit with more complex use of rates and different reserve requirements, Basci was using a similar approach to the one that caused so much consternation from late 2010 until late 2011: a time when Turkey’s economy grew almost as fast as China’s and the current account deficit ballooned.