Turkey takes further steps against currency gains

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Turkey’s central bank cut two of its three main interest rates on Tuesday in a bid to prevent speculative capital inflows from boosting the lira currency too sharply, while also taking steps to cool domestic loan growth.

A healthy economic outlook and the gradual move of each of its credit ratings to investment grade has boosted the appeal of Turkish assets, forcing officials to take steps to battle a flood of cheap cash from central banks in the developed world that threatens to knock its economy off balance.

The bank reduced the borrowing rate to 4.50 percent from 4.75 percent and the lending rate to 8.50 percent from 8.75 percent. But it kept its one-week repo policy rate, which it cut by 25 basis points in December, unchanged at 5.50 percent.

The bank also raised reserve requirements to keep loan growth in check, increasing the amount of lira and forex that lenders have to hold with the central bank.

All 12 economists in a Reuters poll had expected the bank to keep its policy rate on hold at 5.50 percent, while five said they were expecting the bank to trim both ends of the interest rate corridor by 25 basis points.

Eleven had forecast a rise in lira required reserves.

“The measured weakening in the lira is expected to continue as a result of these actions. We expect a steepening in the yield curve,” said Ali Cakiroglu, senior investment strategist at HSBC Asset Management in Istanbul.

The lira initially weakened in response to the bank’s decisions, easing to 1.7760 against the dollar from 1.7700 beforehand. The yield on the two-year benchmark bond
fell as low as 5.70 percent after the decision, from 5.77 percent beforehand.

The bank’s complicated policy mix has drawn criticism from international investors and economists in the past, but has largely come up trumps by keeping Turkey growing steadily and robustly at a time when others are not.

But the bank has come under attack from some government ministers who say it has done too little to boost growth.

The economy is expected to have grown just 2.5-3 percent in 2012, below the government’s 3.2 percent forecast and less than half the pace of the previous year, a slowdown some ministers have blamed partly on cautious monetary policy.

In November, the bank said it would cut interest rates in a measured way if the real exchange rate reached 120-125 on an index measuring the weighted average of domestic prices relative to prices of its trade partners.

The rate rose to 120.16 in January, although the lira has since weakened against the dollar.

Last month, the central bank cut its overnight borrowing rate to 4.75 percent from 5 percent and its lending rate to 8.75 percent from 9 percent. It also raised its reserve requirements.

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