March 8, 2017 / 8:19 AM / 5 months ago

UPDATE 2-Turkish central bank signals more tightening possible, lira weakens

4 Min Read

* Lira weakens more than 1 percent as stronger signal expected

* Central to hold policy meeting on March 16

* Governor sees inflation downtrend from mid-year (Adds analyst comment, markets, background)

By Nevzat Devranoglu

DENIZLI, Turkey, March 8 (Reuters) - The Turkish Central Bank will closely monitor pricing behaviour and implement further monetary tightening if needed, its governor said on Wednesday, but the lira weakened in apparent disappointment he did not give a clearer signal on rates.

Governor Murat Cetinkaya's comments, at a conference in western Turkey, came just over a week before the bank's next rate-setting meeting and helped trigger a lira slide of more than 1 percent against the dollar.

The bank has taken unorthodox tightening steps to stem rising inflation and defend the lira after a slide at the start of 2017, but has not raised its policy rate since last November. Its next rate-setting meeting is on March 16.

"Heightened global uncertainty necessitates a cautious monetary policy stance. Accordingly, pricing behavior will be closely monitored and further monetary tightening will be implemented if necessary," Cetinkaya said.

The bank is tightening liquidity, pushing the average cost of funding up by 20-25 basis points in the last week to a five-year peak against a background of double-digit inflation and Federal Reserve rate hike expectations. Since January, the funding rate has risen 225 basis points.

The lira weakened as far as 3.7310 against the U.S. currency after Cetinkaya's presentation from 3,6770 beforehand. The main share index fell 0.7 percent.

"Probably, market players were expecting a stronger message from the CBT," said BGC Partners chief economist Ozgur Altug, forecasting it will have to tighten more if the Federal Reserve hikes rates next week, as expected.

"However, because of the approaching referendum an outright policy rate hike might not be on the agenda," he said, referring to an April vote on constitutional reform boosting President Tayyip Erdogan's powers.

At its last monetary policy committee meeting on Jan. 24, the central bank hiked its overnight lending rate by 75 basis points to 9.25 percent and the rate at its late liquidity window to 11 percent from 10.

The bank shied away from raising its main repo rate, failing to ease concerns about its independence. Erdogan regularly exerts pressure for lower rates to boost flagging growth.

Altug said the central bank could raise its late liquidity window rate to 12 percent from 11 percent.

To tighten liquidity, the central bank has this week reduced the level of funding which it supplies at 9.25 percent to 12 billion lira from 22 billion last week, meaning it was likely to provide more funding through the late liquidity window rate.

Cetinkaya also said lira depreciation might lead to upside inflationary pressure in the short-term but inflation was expected to trend downward by the middle of the year. (Additional reporting by Ece Toksabay, Tuvan Gumrukcu, Behiye Selin Taner, Writing by Daren Butler, Editing by Angus MacSwan)

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