LONDON Feb 9 With the Turkish lira off record
lows and central bank borrowing costs at the highest in five
years, this week was perhaps a good time for Governor Murat
Cetinkaya to convince London's fund managers he is up to the
After the lira's worst January in almost a quarter of a
century, investors have cut exposure to local assets, fearing
the central bank was incapable of tackling an inflation upsurge.
But Cetinkaya, in a presentation at JPMorgan's London
offices on Thursday, was able to point to the central bank's
weighted average cost of funding as proof the bank is
serious about inflation-targeting.
The rate that the bank currently appears to use as the main
gauge for borrowing costs in the economy is at 10.38 percent, up
more than 200 basis points since the start of the year.
People familiar with the matter told Reuters this week rates
would stay at those levels until inflation peaked.
In London, Cetinkaya confirmed that message, telling his
audience of money managers he intended to keep rates around
current levels as long as needed, to meet inflation targets and
stabilise the lira.
Fund managers who attended said they came away not entirely
convinced. But they had some sympathy for Cetinkaya, who must
balance controlling inflation - currently over 9 percent - with
President Tayyip Erdogan's constant demands for lower interest
"They're trying to make everyone happy with this framework.
That's the challenge," said Claudia Calich, head of emerging
debt at M&G Investments, who attended the event.
Like most investors, Calich has a lower exposure to Turkish
debt than its weight in bond indexes, due to concerns over
central bank independence, a fragile lira and a monetary policy
clouded by a multitude of rates.
At the central bank's last meeting it kept benchmark policy
rates unchanged at 8 percent. But it tightened policy by raising
overnight lending rates and upped rates on a liquidity window -
a lira funding source for banks - to 11 percent.
For the time being that may be enough. Societe Generale
analysts, for instance, advised clients to buy lira, noting that
the central bank's "explicit acknowledgment of accumulating
inflationary pressures and expressed commitment to fighting
inflation" had steadied the currency.
The lira is some 7 percent off record lows, helped by the
dollar's retreat in recent days.
"(Cetinkaya) mentioned that additional tightening could be a
possibility if need be. But would they do it pro-actively or
would the currency need to go under pressure again?" Calich
Appointed last April, Cetinkaya had been deputy governor
since 2012 but Thursday's meeting was the first with him for
many investors, who crowded into a standing room-only meeting.
His lack of formal economics training had made many
sceptical about whether he could stand up to Erdogan, whose
priority is to accelerate economic growth.
One bond fund manager said a gentle audience question about
political pressure on the central bank had been deflected.
"He was as hawkish as he could have credibly been given the
constraint he is under," the fund manager said, requesting
"He sounded like he knew what the market needed and we knew
what constraints the institution operates under," the manager
"Nothing I heard today makes me more comfortable for the
Little was apparently said about simplifying the policy rate
framework, other than that being the bank's eventual aim. But
some investors said they were concerned about Cetinkaya's
references to a "dynamic monetary policy".
"Turkey just needs to tighten monetary policy and hold it
for a considerable period of time to ensure inflation begins to
moderate. Use of terminology like dynamic implies the tight
policy won't be long-lasting," said Tim Ash, senior sovereign
strategist at BlueBay.
(Additional reporting by Karin Strohecker; editing by Andrew