* Basci vows lasting tightening if needed
* Says bank free of political interference
* Lira firms from lows, cost of insuring Turkish debt drops
By Nevzat Devranoglu
ANKARA, Jan 28 Turkey's central bank governor
raised hopes of an emergency rate hike on Tuesday in the face of
opposition from Prime Minister Tayyip Erdogan, denying he was
hostage to political pressures and vowing to fight rising
inflation and a tumbling lira.
Erdem Basci said the bank would not hesitate to tighten
monetary policy in a "lasting way" if needed and asserted the
bank's independence amid investor concern that it has shied away
from rate hikes under pressure from the government.
Erdogan, keen to maintain economic growth ahead of an
election cycle starting in two months, has been a vociferous
opponent of the higher borrowing costs sometimes needed to
bolster currencies, railing against what he describes as an
"interest rate lobby" of speculators seeking to stifle growth
and undermine the economy.
"Now if I make a statement about this issue, they will say I
have interfered with the central bank. But I would like you to
know that as always, I am against a hike in interest rates
today," Erdogan told reporters, hours before the bank's
emergency policy meeting.
"But of course I don't have the authority to interfere with
the central bank ... the responsibility belongs to them."
Erdogan's stance on rates has left the central bank
struggling to contain the lira's precipitous slide. Investor
confidence has been damaged by a corruption scandal shaking the
government, fears about a power struggle and the global impact
of a cut in U.S. monetary stimulus.
Basci ruled out any imposition of capital controls, saying
such moves were "not in our dictionary", and said the sort of
tightening steps taken by the bank so far to support the lira
were "way more effective" when backed by interest rates.
"In Turkey, politicians publicly criticise or praise central
bank decisions ... I don't think it threatens the bank's
independence," Basci told a news conference to announce the
bank's quarterly inflation report.
"Nobody should have any hesitation that the central bank
will use all available tools. The bank will not hesitate to take
steps to make lasting tightening in monetary policy if deemed
necessary," he said.
The lira firmed to 2.2591 against the dollar by
1750 GMT from 2.3120 late on Monday, having touched a record low
of 2.3900 on Monday morning.
The cost of insuring Turkish debt meanwhile eased from
Monday's 19-month highs, according to data from Markit.
The bank sharply raised its inflation forecast for the end
of the year to 6.6 percent, heightening market expectations that
it will hike rates at its first extraordinary monetary policy
meeting since August 2011, the height of the euro zone crisis.
It is expected to raise its lending rate - the cost of its
overnight loans to Turkish lenders - by 225 basis points to 10
percent, according to the median forecast in a Reuters poll of
31 economists taken on Monday.
The bank will announce the outcome of the meeting at
midnight locally (2200 GMT).
WILL IT BE ENOUGH?
Erdogan congratulated the central bank last week after it
left interest rates on hold, despite the lira's tumble, while
his new economy minister came out a day before the meeting
saying the bank should not hike.
"Stand firm, don't raise," the pro-government Yeni Safak
newspaper said in its main front page headline on Tuesday,
alongside a picture of Basci.
"The interest rate lobby based in London and New York
virtually blackmailed the central bank yesterday, pushing the
lira has high as 2.39 against the dollar," the paper said.
Thirty respondents in the Reuters poll, a wide sample of
Turkish and international banks, forecast a rate hike, with
estimates ranging from a rise of 125 basis points to 425. Only
one forecast the bank would leave rates unchanged.
There was less consensus over whether such a move would be
enough to stabilise the lira and tame inflation, with 12
economists saying yes and seven saying no, citing the need for
structural reforms and political stability.
"A one-off rate hike - even an aggressive one - is one
thing, a radical and irrevocable change in the conduct of
Turkish monetary policy in an election year and when growth is
slowing is quite another," said Nicholas Spiro, head of Spiro
Sovereign Strategy in London.
The graft scandal, which triggered the resignation of three
ministers and detention of businessmen close to Erdogan, has
grown into one of the biggest challenges of his 11 years at the
helm, just as he prepares for local elections in March and a
presidential race he is expected to contest five months later.
His reaction, purging the police force of thousands of
officers and seeking tighter government control over courts, has
been criticised by the European Union and raised investor
concern over the rule of law and independence of state
Reluctant up to now to make an outright rate hike, the
central bank has struggled to defend the lira instead by burning
through its forex reserves and trying to squeeze up borrowing
costs on the margins - a battle it has clearly been losing.
The bank raised its mid-point forecast for year-end
inflation to 6.6 percent from a previous forecast of 5.3
percent, well above its target rate of 5 percent.
Basci said inflation would slow from the second half of 2014
and forecast the 2015 inflation mid-point at 5 percent.