UNCLAS ANKARA 000378
SIPDIS
SENSITIVE
SIPDIS
TREASURY FOR INTERNATIONAL AFFAIRS - KMATHIASEN AND JROSE
E.O. 12958: N/A
TAGS: EFIN, TU
SUBJECT: TURKISH CENTRAL BANK GOVERNOR EXPRESSES CONFIDENCE
TO A/S SULLIVAN
1. (SBU) Summary: Central Bank Governor Durmus Yilmaz told
A/S Sullivan that the Bank was hopeful it could achieve its
2008 target and would attain a respectable 5.1% in 2007 if
current conditions prevailed for the remainder of the
year. While this is below the official target (of 4%),
the Governor concluded that increasing the target would
do more to undermine credibility than leaving it intlmaz thought the composbcount
Deficit, with a hpal goods, refle@
that hence of a strong communQary.
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Converging to 4% Target by 2008
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2. (SBU In a February 10 meeting on the margins of the
U.S.-Turkey Bilateral Economic Partnership Commission,
Central Bank Governor Durmus Yilmaz told A/S Sullivan he
believed Turkey's inflation targets were attainable by
2008. Even by yearend 2007, Yilmaz said that 5.1%
inflation could be achieved if three conditions prevailed:
oil at or below $55 per barrel; no change in Turkish risk
premia and the Central Bank maintains constant policy rates
for the first three quarters. Yilmaz said the Bank was
still concerned about unprocessed food prices -- a key
source of January,s high inflation rate -- which are
highly dependent on rainfall.
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Why the Bank Maintained the Inflation Target
--------------------------------------------
3. (SBU) A/S Sullivan asked why the Bank had not changed
its targets, as the impact of last year,s depreciation and
the high January figure indicated that the 2007 target was
likely unattainable. The Governor said the Bank had had
extensive deliberations, both internally and with the IMF,
on whether to revise the targets, and was faced with a
potential loss of credibility either way. Ultimately, the
Governor concluded that a an upward revision would do more
damage to the Bank,s credibility because it would contribute
to higher inflation expectations, adding further upward
pressure on prices. Moreover, the Bank expects market
participants to understand that the 2006 inflation target
was missed because of factors outside the Bank's control,
notably the fall in the exchange rate and the rise in energy
prices.
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Downplaying Current Account Risk
--------------------------------
4. (SBU) Yilmaz recognized that Turkey's large current
account deficit was a key factor behind why the May-June
Emerging Market volatility had a greater impact on Turkey
than other EM's. He emphasized the importance of
continued adherence to tight fiscal policy (e.g, 6.5%
primary
surplus target). The Central Bank estimates that GDP growth
was moderate, at 4.5% in 2006 , and that slower growth
should help stabilize the current account. Yilmaz said
that the rate hikes in response to the depreciation of the
lira were a key factor in the 2006 slowdown in GDP growth.
Like Minister Babacan (septel), Yilmaz said that the risks
associated with the large current account deficit were
mitigated by its improved composition. He also noted that
with a low savings rate and 800,000 to 900,000 young people
coming into the job market every year, Turkey needs
investment.
This can be seen in the substantial proportion of capital
goods in the Turkey's imports.
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CentrQl Bank Independence and Focus on Communication
--------------------------------------------- -------
5. (SBU) In reply to A/S Sullivan's question about Central
Bank independence, Yilmaz said, "The Central Bank is not a
Republic within a Republic." He noted that the country is
governed by the Government, but the law gives the Central
Bank
independence and "we are working to maintain it." If the
inflation trend is being affected, Yilmaz said he would not
hesitate to use the Bank's independence for the good of the
country. Vice-Governor Erdem Basci pointed out that the
Bank benefits from the public's experience of high
inflation and the consensus in favor of achieving price
stability. Yilmaz went on to say that, consciously or
unconsciously, people know that the nineteen quarters of
high growth have coincided with declining inflation.
6. (SBU) Yilmaz also emphasized that he fully understands
that
importance of strong communication with the politicians,
the public and the financial markets. The Governor said
that he formally describes Bank policy to parliament twice
a year, issues a open letters to the Government must report
to the government and the IMF when it deviates from its
inflation target. The bank also issues regular inflation
reports, a financial stability report, and conducts inflation
expectation surveys. The Bank recently increased the
horizon of these surveys from 18 to 24 months ahead, in an
effort to keep the focus on the achievability of its 2008
target. The Bank holds a board meeting outside Ankara
every quarter and uses the occasion to have the Governor
appear before local business groups, as it did recently in
Bursa. Given the crucial role of foreign investors in
Turkish financial markets, Basci and Yilmaz described their
focus on better and more timely translations of the minutes
of Monetary Policy Committee (MPC) meetings and the
inflation report. The Bank has hired more translators but
senior management personally translates the MPC statement
the same evening.
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Redollarization Only Temporary
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7. (SBU) U.S. Treasury Office Director Karen Mathiasen
briefly touched on developments in the U.S. economy and
passed on some of the concerns expressed to her by Istanbul
market analysts. When she noted the recent`g-term trend towards a smapeign
currency-denominanealthy Turkish individuals used these
funds, the GoveQthe share of foreign
eted deposits would resue its declining
trend.
A/S Sulivan cleared this cable.
Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/
WILSON