Turkish central bank head says to stay put after lira hits record low

[February 27, 2015]  By Nevzat Devranoglu

ISTANBUL (Reuters) - Turkish Central Bank Governor Erdem Basci sought to calm jittery investors on Friday, appearing to dismiss rumors that he would resign and giving a brief lift to the lira currency after it tumbled to a record low.

Basci's future, and the independence of the central bank, have been a concern for investors, particularly since President Tayyip Erdogan's criticism of the bank this week after it failed to meet his demand for bigger rate cuts.

In a sign of the pressure Basci faces, Economy Minister Nihat Zeybekci was quoted as saying on Friday that the main interest rate should be cut to 6 percent from 7.5 percent as borrowing costs were "not tolerable".

But Basci told reporters his absence from work on Thursday was due to a health check-up that did not reveal any serious problems, and was not a sign of an imminent departure, as some market participants had feared.

"A public duty is performed for the period it is assigned and it is performed in the best way. As our health allows, we will continue to fulfill the requirements of this duty," he said in comments broadcast by CNN Turk.

That helped the lira recoup some losses after hitting a record low of 2.517. However, the recovery was short-lived and the currency was at a new record low of 2.524 by 7.18 a.m. ET as investors focused on a speech by Erdogan at a lunch for provincial governors.

"President Erdogan's comments will be critical for the market today. We could see strong selling pressure if he continues his criticisms of Basci today," said one senior banker.

Erdogan said on Wednesday that the bank's monetary policy was "unsuited to the realities of the Turkish economy" after it failed to meet his demands for rate cuts larger than those it made on Tuesday. He questioned whether the bank was under external influence.

The main share index fell 1.5 percent on Friday, while the yield on the benchmark 10-year government bond rose to 8.56 percent from a spot close of 8.21 percent on Thursday.

Traders viewed Erdogan's questioning of whether the bank was under external influence as a thinly veiled reference to U.S.-based cleric Fethullah Gulen, a former ally whom Erdogan accuses of infiltrating state institutions in a bid to unseat him. In the past year, Gulen followers have been systematically purged from bodies including the police and judiciary.

Erdogan's criticism has also triggered speculation about the future of respected Deputy Prime Minister Ali Babacan, an anchor of investor confidence in Turkey for more than a decade.

Babacan, who is in charge of the economy and has been a staunch defender of central bank independence, met Prime Minister Ahmet Davutoglu for more than two hours following Erdogan's comments, which rattled financial markets.

(Writing by Daren Butler; editing by David Dolan and Anna Willard)

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