VZCZCXYZ0000
RR RUEHWEB

DE RUEHAK #0378/01 0530933
ZNR UUUUU ZZH
R 220933Z FEB 07 ZDK
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 1044
INFO RUEHIT/AMCONSUL ISTANBUL 2170
RUEATRS/DEPT OF TREASURY WASHDC

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. 
 
---------------- 
Converging to 4% Target by 2008 
------------------------------- 
 
¶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. 
 
-------------------------------------------- 
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. 
 
-------------------------------- 
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. 
 
------------Q-------------------------------- ------- 
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. 
 
------------------------------ 
Redollarization Only Temporary 
------------------------------ 
 
¶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