Turkey cbank says latest policy move meant as tightening

Wed Feb 20, 2013 11:57am GMT

* Bank cut rates, raised reserve requirements

* Says net effect is monetary tightening

* Complex policy mix has sometimes baffled investors

By Seltem Iyigun

ISTANBUL, Feb 20 (Reuters) - Turkey's central bank told economists on Wednesday the net aim of its latest policy moves, in which it cut interest rates and raised reserve requirements, had been to tighten monetary conditions and signalled it would take similar steps again.

The central bank cut its overnight borrowing and lending rates by 25 basis points on Tuesday to prevent speculative capital inflows from boosting the lira too sharply, and raised reserve requirements to cool loan growth.

The bank has been walking a fine line trying to stoke weak domestic demand without fuelling inflation, and its complex policy mix has at times baffled investors. It holds a briefing with economists the day after its policy decisions.

At the meeting, the bank said the net effect of its actions on Tuesday had been to tighten policy by making it more expensive for banks to give loans, both through the rise in required reserves and the lower overnight lending rate, which makes lending less profitable for banks.

"The central bank underlined that what they did (on Tuesday) is a tightening in monetary policy," one of the economists who attended the meeting in Ankara told Reuters.

"It signalled it could cut the rates further while keeping the interest rate corridor gap intact. But it didn't suggest any cut in the policy rate," he said.

Since late 2010 the bank has been using an unorthodox policy mix based on daily liquidity management, a low policy rate, high required reserves and an adjustable interest rate corridor, the gap between its overnight lending and borrowing rates.

Tuesday's moves shaved a quarter point off its borrowing and lending rates but kept its one-week repo policy rate, which it cut by 25 basis points in December, unchanged at 5.50 percent.

The central bank said it had cut the borrowing rate to deter short-term capital inflows and the lending rate due to high loan spreads, the differential between banks' cost of funding and the interest rates they charge on loans, economists said.

The bank signalled it could gradually increase required reserves further as economic growth accelerates, while cutting rates again if the lira appreciates, economists said.

"It didn't say it explicitly but I think it will cut rates each time the real exchange rate rises above 120 and will raise required reserves as long as loan growth is strong," a second economist who attended the meeting said.

In November the bank said it would cut rates in a measured way if the real exchange rate reached 120-125 on its index, and would use all policy tools available if it rose above 130. In January it stood at 120.16. (Writing by Seltem Iyigun; Editing by Nick Tattersall and Patrick Graham)