His appointment in 2006 was marred by controversy, and global emerging markets took a sharp tumble just weeks after he took office. For Governor Yilmaz, things did not get any easier in 2007. A tense double election for parliament and the presidency coincided with a US credit crunch that sent many equity and high-yield markets into freefall.
But the Turkish lira and local bond markets tell a different story, and their remarkable resilience in 2007 is testimony to Yilmaz’s success in restoring credibility. A tough response to the inflation overshoot in 2006 – hiking the benchmark overnight borrowing rate by 425 basis points to 17.50% – was one element, but Yilmaz also points to the importance of information and communication.
On the first priority, he has strengthened the monetary authority’s research department, and the results have been evident from the central bank’s inflation forecasts. In 2007, these have consistently proved more accurate than those of respondents in the central bank’s fortnightly inflation expectations survey. But in keeping with the second priority of communication, Yilmaz tells Emerging Markets: “We blame ourselves, not the respondents. There is a technical side to central banking, collecting and analyzing the data. But there is also an art, how to tell it and sell it to the market.”
The need to manage price- and wage-setting behaviour means he is not a believer in the opaque approach most famously associated with former Federal Reserve chairman Alan Greenspan. Instead, he has clearly stated that he expects inflation to reach its 4% target (plus or minus 2%) by mid-2008, despite headline shocks from food prices that pushed the year-on-year rate to 7.3% in August 2007.
Even so, he managed a small surprise of his own in September 2007, cutting the borrowing rate down to 17.25% after originally indicating that monetary easing would begin only in the fourth quarter. The lira rallied on the move, suggesting that a deeper confidence in monetary stability, not just high yield, is the attraction for investors.
This is certainly true for Kieran Curtis, who runs foreign and local currency emerging market debt portfolios worth more than $700 million for Morley Fund Managers. “The introduction of central bank bills in July was especially positive, as it gave them an extra tool to manage liquidity without affecting the Treasury,” he tells Emerging Markets.
By freeing the central bank from issuing Treasury bills, this innovation also reinforced the independence of the central bank, already enshrined in law. That independence was called into question during the selection process for a new governor in 2006. Yilmaz was only appointed after a previous candidate, who was close to the AKP government, was rejected as inappropriate by the then president Ahmet Necdet Sezer, with rumours of a second candidate turning down the post as well.
Today the governor speaks with the tone of a man confident of his authority. Asked if the budget could be brought back on target after the AKP loosened the purse-strings ahead of elections, he replies simply: “There is no ‘could’. It must be.”