Cablegate: Central Bank Governor On Macro Situation, Monetary

Published: Wed 17 Nov 2004 04:28 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
171628Z Nov 04
E.O. 12958: N/A
B. ANKARA 6426
1. (Sbu) Summary: Turkey's Central Bank Governor is
optimistic about disinflation and downplays the risk inherent
in the current account deficit. He favors a cautious
approach to moving monetary policy to explicit
inflation-targeting. Serdengecti is opposed to forgiving
Turkish claims on Iraq. (The Governor,s comments on IMF
negotiations are reported septel.) End Summary.
Positive Inflation Outlook:
2. (Sbu) In a November 12 meeting, Central Bank Governor
Sureyya Serdengecti was optimistic that the 2004 consumer
price inflation target of less than 12% would be met. Though
the October CPI and WPI numbers had come in surprisingly high
(at 2.2% and 3.2%, respectively), the Governor did not think
this represented a trend. In addition to seasonal factors,
he said the October numbers were driven up by unusual factors
in agricultural prices and the advent of Ramadan, which
typically causes prices to rise. In addition, higher world
oil prices began to have an impact on consumer prices.
(Serdengecti noted that he had been urging the Government to
pass through the full effect of higher world oil prices in
2004, rather than in 2005, when, he thought, meeting the 8%
CPI target would be difficult.)
3. (Sbu) While many structural components of inflation had
been eliminated, Serdengecti continued to be concerned about
rigidities in rents and services prices. Overall, he
believes the economy is neither overheating nor slowing down
in a way that would imply a need for changes in current
monetary policy. The Bank had begun focusing on this
objective several months ago, keeping in mind that achieving
next year's target is important for Central Bank credibility.
He was pleased that the exchange rate was not the cause of
the higher October inflation numbers.
Structural Changes in the Turkish Economy:
--------------------------------------------- ----------
4. (Sbu) Serdengecti pointed to a number of favorable trends
in the Turkish economy. On oil prices, he asserted that
companies can no longer pass on the full extent of their cost
increases to consumers. He said that the State Statistical
Institute is working on changes to the CPI basket. He
believed this change may lead to a finding that inflation has
been lower than previously reported. The Institute will also
develop a new calculation of core inflation -- CPI minus food
and energy prices -- which the Central Bank could then begin
targeting directly. Serdengecti pointed to the huge
increases in productivity in the private sector and the
shrinking share of the public sector in the economy as
evidence of the non-inflationary nature of growth. Overall,
he considers that most of the remaining problems lie in the
public sector.
Inflation Targeting:
5. (Sbu) Though Serdengecti agrees with the IMF that the Bank
should move to "full-fledged" explicit inflation targeting
over the medium term, he continues to urge caution: "If you
are not successful with inflation targeting, what do you do?
You cannot target the exchange rate and you cannot target
money supply in a high inflation environment." He
nevertheless accepts the need to prepare for explicit
inflation targeting once a new program with the IMF has been
agreed to and there has been a long period in which Central
Bank has built up credibility.
Current Account Deficit:
6. (Sbu) Serdengecti asserted that the public discussion of
the current account deficit reflected past experience and an
inability to fully comprehend the implications of a floating
exchange rate regime. To support the case that it,s a real
float, he pointed out that the Central Bank had not been in
the foreign currency market for five months. If people
complain about the risk of the current account deficit, "We
answer they should buy more dollars, but they don,t want
to," the Governor said.
7. (Sbu) Serdengecti also confirmed press reports that the
bank was considering resuming its foreign exchange purchase
auctions. These purchases would help the Bank build
reserves, which he admitted were not high enough given
Turkey,s large foreign debt service requirements in coming
years. Other than reserve building, he said the Central Bank
reserved the right to intervene if markets are too volatile,
in which case they may buy large quantities on a single day.
Serdengecti acknowledged and agreed with the IMF,s point
that the Bank should make its intervention policy more
transparent and said it would do so.
Iraq Debt:
8. (Sbu) Econ/C raised the issue of the Central Bank,s
holding of Iraq debt and pointed out the importance of debt
forgiveness to ensure Iraq,s stability. The Governor said
the Bank would have a problem with debt forgiveness, claiming
that Turkey, a poor country, could not afford debt
forgiveness, even for a very good cause. He said that if the
Central Bank did forgive the debt, the Government would have
to compensate it for the loss, and in a context of tight
fiscal policy it would be difficult for the Government to do
so. While expressing sympathy for the Iraqi people, he noted
that Iraq, unlike Turkey, had significant oil resources.
While open to a rescheduling or "doing something about
interest," he opposed forgiveness.
9. (Sbu) We raised the Iraqi debt issue with Serdengecti
since most of Turkey,s Iraq debt is held by the Central
Bank. However, it will be the Turkish government, not the
independent Central Bank, that will need to make the policy
call on Iraq debt, with an eye to more than economic
considerations. Serdengecti deserves tremendous credit for
having preserved Central Bank independence and for bringing
down inflation. Although there are risks, the move to
explicit targeting of inflation will be jewel in the crown of
his successful campaign to transition Turkey to a more
"normal", low-inflation economy.
Baghdad minimize considered.
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