UPDATE 1-Turkish central bank optimistic on growth, looser policy seen

Thu Apr 17, 2014 10:13am EDT

Related Topics

* Basci sees no need to cut growth target

* Says inflation to peak in May

* Economists see easier policy, no rate cut yet (Adds details on meeting, growth outlook)

By Orhan Coskun

ANKARA, April 17 (Reuters) - Turkish economic growth will fall just short of the central bank's 4 percent target this year and inflation will peak in May, governor Erdem Basci said on Thursday, giving an upbeat view of the economy a week before a rate-setting meeting.

Basci told the bank's annual general assembly that he saw no need for Turkey to lower its growth target for this year despite the World Bank and International Monetary Fund's recent cuts to their outlooks for the country.

His views on growth and inflation, which he said would remain "well above" the bank's 5 percent target this year, were more optimistic than the market consensus, suggesting to some that he was paving the way for looser monetary policy - albeit not outright rate cuts - in the months ahead.

The bank meets to set interest rates next Thursday.

"The central bank appears to be hedging its bets, mulling a loosening of policy but clearly conscious of the risks of a premature cut in interest rates," said William Jackson, emerging markets economist at Capital Economics in London.

"Rather than cutting interest rates, it seems more likely that the monetary policy committee will use other measures to modestly ease monetary conditions, for example via cuts in required reserve ratios," he said.

Basci's growth outlook was double the consensus in a Reuters poll of 25 economists, which on Wednesday forecast growth of only slightly above 2 percent this year.

Economists cited concerns in that poll about political instability and said a round of huge interest rate hikes by the central bank in late January had crimped the outlook for growth.

Markets were unmoved by Basci's comments, with trading volumes low ahead of a holiday weekend in much of Europe.

The 10-year benchmark yield was almost flat at 10.07 percent, while the lira firmed slightly to 2.1310 to the dollar by 1306 GMT from 2.1355 late on Wednesday.

POLITICAL MEDDLING

Economists say the usually innocuous general assembly, at which executives and technocrats are elected and reshuffled, had taken on greater significance after Prime Minister Tayyip Erdogan's recent call for rate cuts.

Erdogan, a vocal opponent of high borrowing costs, urged the bank to cut rates after his ruling party's strong showing in March local elections, which he said had reduced political uncertainty.

That revived concern about the independence of the central bank, and Basci hinted only days later at the possibility of eventually cutting rates.

While no major changes to the bank's assembly were announced on Thursday, a columnist for pro-government newspaper Yeni Safak was named to its audit committee. Basci also dismissed suggestions on Twitter that one or two deputy governors may resign.

"Other than official statements do not pay attention to rumours," he told reporters.

Turkey's growth in the past decade in part has been based on stability during most of Erdogan's rule, which began in 2002. But growth has slowed sharply, inflation is now well above target and consumer confidence is at a four-year low.

After clocking growth of 8.5 percent in 2011 - faster than anywhere in Europe at the time - the economy expanded by just 2.1 percent in 2012 and 4 percent in 2013.

Expectations for the withdrawal of U.S. monetary stimulus have hit Turkey and other emerging economies in recent months, although the general view is that the U.S. Federal Reserve will only raise interest rates around the third quarter of next year.

Turkey's central bank jacked up all interest rates in late January by more than 4 percentage points each to halt the lira's slide after it hit record low levels.

That tightening is expected to keep loan growth in check and dampen domestic demand, one of the main drivers of Turkey's large current account deficit, its main economic weakness.

Basci said he expected the current account balance to continue to improve and said loan growth was falling towards the bank's 15 percent reference rate. (Additional reporting by Ozge Ozbilgin in Ankara; Writing by Seda Sezer; Editing by Nick Tattersall)

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