* C.bank says could tighten policy further if needed
* Bank adjusts gold reserve requirement levels
* Bank has become more hawkish as lira weakens
* Lira gives up initial gains after statement
(Adds analyst comment, details, updates mkt reaction)
By Daren Butler
ISTANBUL, March 27 Turkey's central bank held
all of its key interest rates steady on Tuesday and pointed to
reductions in the volume of cheap cash it supplies to banks,
also warning it can tighten policy further if need be to tame
The bank, seeking to support the lira currency while also
trying to stimulate a flagging economy in a complicated policy
mix, left its main one-week repo rate at a record low of 5.75
The central bank also announced a doubling to 20 percent in
the amount of lira reserves which banks can hold in gold while
no longer allowing any foreign exchange reserves to be held in
gold - moves which should give markets a lira liquidity boost.
The decisions on rates and reserve requirements were broadly
in line with a Reuters poll of analysts ahead of the meeting.
But a small minority had speculated the bank could cut the
lending rate and the bank's announcement of a low figure for
upcoming repo auctions of short-term loans for banks helped to
strengthen the lira.
"The central bank still maintained its hawkish bias in the
near term, in particular by reducing the size in the weekly
auction," Benoit Anne, head of emerging strategy at Societe
"It was a message that for the time being the policy bias is
towards a more hawkish direction."
The bank has swung back towards tightening some elements of
policy after the lira fell almost 4 percent on the back of last
month's surprise cut in the overnight lending rate.
But policymakers also remain anxious to support an economy
slowing from double-digit growth a year ago and they continue to
tinker with a wide range of policy levers in the hope of
boosting domestic lending without weakening the lira.
"At home the domestic data is pretty woeful in Turkey. It
looks like the first quarter is going to be pretty weak. The
bigger picture is that growth seems to be slowing, and there is
not much they can do in terms of a dramatic loosening in policy
to cushion that blow," said Capital Economics chief EM economist
The lira inched up to 1.7811 against the dollar after the
decision from 1.7835 before the decision, but subsequently
weakened back to 1.7855.
The central bank kept its overnight borrowing rate at 5.0
percent and the lending rate at 11.5 percent
Among a range of measures implemented over the last year
have been adjustments in the levels of reserves which banks must
hold at the central bank, designed to provide banks with more
flexibility in their liquidity management.
Under the latest measures, banks will now be able to keep 20
percent of their lira reserves at the central bank in gold,
while the amount of forex reserves that can be held in gold is
reduced to zero.
The bank said its latest required reserve measures would
boost the central bank's forex reserves by some $1.3 billion,
while its gold reserves could rise by $2.2 billion if the gold
facility is fully used. As a result, it is expected to release
some 6.1 billion lira liquidity to the market if the facility is
The bank said in its statement it could offer as little as 1
billion lira at repo auctions between now and April 18, setting
a band of 1-6 billion lira. The upper limit of one-month repo
auction volumes was lowered to 5 billion lira from 6 billion for
the March 30-April 19 period.
It also sent a warning shot on the chances of it tightening
policy if need be to act against inflation.
"In the period ahead, factors affecting inflation will be
closely watched and on days when it is deemed necessary the
practice of additional monetary tightening may be repeated," the
bank said in its statement.
Inflation is still above 10 percent, around twice the
central bank's target, largely due to high world oil prices.
While policymakers expect it to fall back into single digits by
May, any weakening of the lira would increase the cost of
Turkey's oil - all of which it has to import.
(Additional reporting by Seda Sezer and Seltem Iyigun; Writing
by Daren Butler; editing by Stephen Nisbet)