UPDATE 1-Turkish c.bank cuts lira RRRs, boosting liquidity

Thu Oct 27, 2011 5:23am EDT

Related Topics

* Lira RRRs cut on maturities of up to six months

* Move seen providing 11 bln lira liquidity

* C.bank forex reserves seen boosted by $4.7 bln (Adds quote, details, background,)

By Daren Butler

ISTANBUL, Oct 27 (Reuters) - The Turkish Central Bank lowered required reserve ratios (RRRs) on lira deposits of up to six months' maturity on Thursday in a move which it said was expected to provide some 11 billion lira ($6.2 billion) of liquidity to the market.

It also raised the upper limit for lira RRRs which may be held in foreign currencies to 40 percent from 20 percent, a move that could lift central bank reserves by $4.7 billion if the facility is fully used, the bank said in a statement.

The measures were part of an "action plan" which the bank unveiled on Wednesday and which is focused primarily on tightening monetary policy to prevent lira depreciation having a lasting impact on inflation. The reduction in RRRs is seen easing the burden on the banking sector.

"The RRR cut will be accompanied by a tightening of lira liquidity through a declining volume of open market operations. The RRR cut is for the sake of banking sector profitability," said Oyak Securities chief economist Mehmet Besimoglu.

There was little market reaction to the moves -- which had been expected -- in the wake of the EU summit. The lira has strengthened to 1.75 against the dollar while bond yields have risen sharply since Wednesday's central bank announcement.

The bank reduced the RRR on private current accounts and deposits of up to one months' maturity to 11 percent from 16 percent. It cut the ratio to 11 percent from 12.5 percent for maturities of up to three months and to 8 from 9 percent for accounts and deposits of up to six months' maturity.

"With the reduction in Turkish lira required reserve ratios, the currently available data suggests that liquidity amounting to approximately 11 billion Turkish lira will be permanently supplied to the market," the bank said.

It said the weighted average required reserve ratio was coming down to 10.5 percent from 12.6 percent under the changes taking effect from Oct 28.

On Wednesday, Central Bank Governor Erdem Basci signalled the overnight lending rate, which was raised this month, would become a more important policy tool as the bank seeks to stem inflation pressure.

It began tightening this month when it raised the overnight lending rate to 12.5 percent from 9 percent. It left its key policy rate, the one-week repo rate, unchanged at 5.75 percent.

The bank also sharply raised its year-end inflation forecast, citing excessive depreciation of the lira, which has lost 16 percent of its value against the dollar this year.

The central bank's moves this month mark a departure from the unorthodox policy mix it introduced late last year, which coupled lower interest rates to deter inflows of hot money and weaken the lira with higher required reserve ratios for banks in order to curb loan growth.

The greater flexibility for banks to hold lira RRRs in forex was set to boost central bank forex reserves, which had fallen to $85.9 billion in mid-October from $92 billion at the start of August, when the central bank began forex selling auctions. ($1 = 1.760 Turkish lira) (Additional reporting by Seltem Iyigun; Writing by Daren Butler; Editing by Catherine Evans)

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