* Central bank announced rate hike at midnight
* Governor Basci torn between political and market pressures
* Former academic fond of experiments, risked credibility
* Turkish lira rallies from record lows to dollar
By Alexandra Hudson
ISTANBUL, Jan 29 Torn between an angry prime
minister railing against an interest rate hike and punitive
markets baying for a rise, Turkish Central Bank Governor Erdem
Basci opted for a bold increase in rates that has stunned
On Tuesday morning, he faced a front-page headline "Stand
firm, don't raise" in Yeni Safak, a paper close to the
government, ahead of an emergency policy meeting, called as the
lira plunged to unprecedented lows.
A few hours later, he calmly fielded questions from critical
international analysts and the press, insisting the central bank
had the resources and strategy to overcome the biggest bout of
volatility in Turkey's markets in a decade.
And shortly after that, the 47-year-old risked Prime
Minister Tayyip Erdogan's wrath, putting up interest rates
dramatically in a move that spurred the lira to its biggest jump
in five years and boosted investors' hope that a cycle of
selling in emerging markets may have been short-circuited.
In one of the world's most unorthodox policy mixes, the bank
had been battling to support the weak lira with foreign exchange
auctions, liquidity adjustments and verbal intervention while
avoiding outright rate hikes.
Erdogan's government has condemned rate increases as
pandering to an "interest rate lobby" of foreign investors and
harmful to economic growth, creating a political climate in
which those calling for rate hikes are left feeling like enemies
of the state.
But on Wednesday, Basci, was being congratulated for bold
action that also averted a domino crisis in emerging markets.
"The policy response to severe financial stability risks was
punchy, aggressive and credible. An amazing job overall," said
economist Benoit Anne at Societe Generale.
"The Central Bank of Turkey is now back in the game after
going through a few tough weeks during which its credibility was
heavily challenged by emerging market investors."
Many Turkish newspapers used pictures of Basci looking
determined, his fists clenched.
"Hawkish step from Basci," said Milliyet, with a cartoon of
the governor as a weight lifter. "The central bank pulled out
its interest rate gun," said the daily Taraf.
But the pro-government Sabah newspaper took a more critical
line, predicting that the economy would stall.
Alarmed investors have fled Turkish assets as a high-level
graft case engulfed figures close to the government, hastening
an exit that followed curbs in U.S. monetary stimulus.
Erdogan has launched a purge of the judiciary and police in
response to the corruption probe, testing investors' faith in
the independence of state institutions and adding to pressure on
Basci to show that the bank does not bow to politicians.
Former academic Basci has seen his name become so synonymous
with opaque, elaborate monetary policy since taking the helm in
2011 that some analysts had speculated the midnight-hour
announcement might herald yet more monetary black magic.
But during a presentation of the bank's quarterly inflation
report earlier on Tuesday, Basci made clear he would take
decisive action to fight rising inflation and a tumbling lira.
"Actually I think this is about a return to orthodoxy for
now," Murat Ucer, an analyst at Istanbul-based investment
consultancy Global Source Partners, told Reuters on Tuesday.
Basci took charge as Turkey emerged from the global
financial crisis and faced dizzying growth rates and a rush of
speculative hot money.
Highly respected for his prodigious command of academic
theory, he viewed himself as a maverick central banker
experimenting with policy tools often untested by more orthodox
peers, according to those who have worked closely with him.
To deter destabilising flows of speculative money into
Turkey, Basci created a wide "corridor" between the rates at
which the central bank borrows and lends in the overnight money
market, and manipulated funding costs inside the corridor.
The result has been one of the world's most complex monetary
policy mixes, often to the frustration of economists who have at
times accused him of trying to do too much in too complex a way.
To general surprise, the bank has now raised its overnight
lending rate to 12 percent from 7.75 percent, its one-week repo
rate to 10 percent from 4.5 percent, and its overnight borrowing
rate to 8 percent from 3.5 percent - all much sharper moves than
economists had forecast.
Central bank insiders describe a highly centralised
decision-making process around Ankara-born Basci, who is
surrounded by monetary policy committee members also largely
from academic backgrounds and reluctant to challenge him.
Ideologically close to Erdogan's Islamist AK party, he was a
childhood friend of Deputy Prime Minister Ali Babacan, seen by
international investors as one of the more trusted members of
the government's economic team.
His wife wears the Islamic head scarf, possibly one of the
reasons why he didn't get the governorship in 2006 when he was
vetoed by Turkey's staunchly secular then-president.
Basci taught in Turkey and Britain before becoming central
bank deputy governor in 2003.
In January 2013, the London-based magazine The Banker named
him central bank governor of the year, saying the bank "had
moved ahead of other emerging markets" in designing steps to
cope with volatile international capital flows.