UPDATE 1-Turkish cbank to keep tight stance but lower policy rate possible -Kenc

Thu May 8, 2014 5:28am EDT

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(Adds comment on interest payment on bank reserves)

LONDON May 8 (Reuters) - Turkish monetary policy will stay tight until there is a "significant improvement" in the inflation outlook but that does not rule out the possibility of a slightly lower policy rate, deputy central bank governor Turalay Kenc said.

"The good thing about the inflation outlook is inflation expectations have deteriorated but the deterioration is really quite ... moderate," Kenc told a conference organised by Mitsubishi UFJ Securities in London on Thursday.

"We will maintain tight monetary policy until there is a significant improvement in the inflation outlook," he said, but added: "A slightly lower policy rate would still give you a tight monetary policy stance."

Inflation rose more than expected in April, a year-on-year increase of 9.38 percent, staying stubbornly above the central bank's newly-raised 7.6 percent forecast for the end of the year.

Kenc also said the bank was considering resuming the payment of interest on lenders' required reserves, which it stopped at the end of 2010, in a further step to ease its tight policy, although he said any such move would be measured.

"If we pay interest on reserves that will also be easing and we are trying to find the right time to do that," he said.

"Whatever we do will be measured because there is a fine balance between the banks' reserve requirements and the forex liabilities. Any rate higher than 3 percent will disturb that balance," Kenc said.

He reiterated that the bank expects Turkey's economic growth in 2014 to be close to 4 percent and to see a significant improvement in the current account deficit, the country's main economic weakness. (Reporting by Sujata Rao; Writing by Nick Tattersall; Editing by John Stonestreet)

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