VZCZCXRO7317
RR RUEHDA
DE RUEHAK #2052/01 2221445
ZNR UUUUU ZZH
R 101445Z AUG 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 3343
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 3147
RUEHDA/AMCONSUL ADANA 2218
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 002052 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE 
 
SENSITIVE 
SIPDIS 
 
REF: ANKARA 685 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: Central Bank Governor Stays focused on Inflation 
 
 
¶1.  (SBU) Summary: The Central Bank of Turkey (CBRT) noted in its 
recent inflation report that the Government should restrain spending 
to help the CBRT meet its inflation target this year.  CBRT Governor 
Durmus Yilmaz affirmed this view to us, and noted that the CBRT has 
not changed its stance despite the current global market volatility 
and the expected impact of a bad harvest on food prices.  Yilmaz 
said external factors are the biggest threat to price stability and 
said the CBRT was closely monitoring Turkey's current risks.  End 
Summary. 
 
¶2. (SBU) Central Bank Governor Durmus Yilmaz met with us on July 30. 
 The meeting coincided with ongoing global market turbulence as 
global portfolio investors work to lower their risk profile by 
pulling out of emerging markets.  Governor Yilmaz said the CBRT is 
fully aware of the local risks for Turkey as well as risks arising 
from global developments.  Yilmaz said that inflation is still 
trending downward but any interest rate cut will have to wait until 
he has data confirming this trend and the medium term inflation 
outlook.  The Central Bank currently keeps its simple annual policy 
rate at 17.50% (19.12% on compound annual basis) with real interest 
rates around 8-9%. 
 
¶3. (SBU) In his public statements on July 27, the Governor said the 
CBRT might increase the reserve requirement ratio for banks if it 
perceived excessive credit expansion in the economy.  Yilmaz said 
CBRT was watching demand-side pressures very closely. 
 
¶4. (SBU) Yilmaz noted that it was too early to relax on the 
disinflation process in part because of increased government 
spending before the July elections that constituted a risk to price 
stability.  Yilmaz also said that external risk factors now are of 
more concern than domestic--and that the current "global credit 
market problem" could be a major risk for Turkey.  Since the CBRT 
has no control over these factors, it is even more important for the 
government to control spending and for the CBRT to be very cautious 
in cutting interest rates. 
 
¶5. (SBU) The Central Bank has been under attack from exporters and 
some government figures because of the strength of the Turkish Lira. 
 Yilmaz said that the CBRT's policy is to bring inflation down and 
keep it within its inflation targets.  The appreciation of the lira 
is a by-product of the CBRT's anti-inflation policies and increased 
confidence in the economy.  Yilmaz emphasized that the CBRT does not 
target or set exchange rates.  When asked whether the bank was 
receiving any political pressure, the Governor said that the CBRT 
had to listen to government concerns, but should not deviate from 
its inflation targeting policy under pressure. 
 
¶6. (SBU) Increased public spending before the elections caused 
budget balances to deteriorate and may cause the primary surplus 
ratio to go as low as 5% of GDP this year, versus the 6.5% annual 
target.  The Central Bank publicly recommended that the Government 
introduce some spending measures to stay within budget limits.  The 
Governor said that there was sufficient coordination among state 
agencies, especially between the Central Bank and the Treasury. 
Treasury has non-voting representation and shares information at the 
Monetary Policy Committee (MPC) meetings.  There are also regular 
market maker meetings held between banks, the Central Bank and the 
Treasury. 
 
7.(SBU) The Governor said inflation was showing a downward trend and 
the bank estimated the year-end mid-point of the expected inflation 
range to be 6% for 2007 under an assumption of easing in policy 
rates in the last quarter.  As a result of the hot weather 
conditions and a poor harvest caused by the current drought, 
unprocessed food prices remain a threat to prices for the remainder 
of the year.  The Central Bank carries out regular in-house surveys 
and the recent July 10 survey was pointing to higher food prices. 
The CBRT also expects a higher inflation reading for August and 
September due to seasonal factors like increased school spending. 
 
¶8. (SBU) Comment:  Turkey has come a long way on the economic policy 
front in the past six years, bringing inflation down from 70% per 
year to around 9-10%.  The move to a formal inflation targeting 
regime in January 2006 commits the CBRT to reducing the annual 
inflation rate to 3-4%.  Governor Yilmaz is signaling that restraint 
on government spending is a necessary, but not sufficient, condition 
for interest rates to come down.  Even if spending does moderate, 
the CBRT may not cut rates until after it sees food and energy price 
data.  His willingness to call publicly for Government fiscal 
restraint before he will consider an interest rate cut is a 
noteworthy exercise of CBRT independence, given the intense 
political pressure on the bank and the government to ease monetary 
policy to avoid an overly-strong lira.  The Governor believes that 
the government plays a key role in shaping price expectations and 
 
ANKARA 00002052  002 OF 002 
 
 
any CBRT announcement regarding future measures will have an 
immediate impact on wage/price setters.  End Comment 
 
McEldowney