(Adds fresh analyst quote, forex rates)
By Simon Cameron-Moore
ISTANBUL, April 18 Turkey's central bank kept
interest rates and banks' reserve requirements on hold on
Wednesday but warned it may have to tighten market interest
rates more frequently to head off risks to inflation from higher
The bank for the first time this year refrained from
tinkering with a complicated policy mix aimed at taming
inflation while avoiding a collapse in growth.
But its statement again struck a hawkish tone, saying it
would not allow inflation to worsen on the back of fuel costs -
crucial for a country that imports most of its oil and gas -
which it warned will push up prices in the short term.
"The committee will not tolerate temporary factors to have
an adverse impact on the inflation outlook," the bank's monetary
policy committee said in a statement after its monthly
"Accordingly, it was underscored that additional monetary
tightening may be implemented more frequently in the forthcoming
As a result, the lira rose against a dollar/euro basket
to 2.0674 from 2.0700 late Tuesday.
The lira recovered from early lows against the
dollar to stand around 1.7902 to the dollar in late trade,
virtually unchanged from late Tuesday.
Some traders interpreted the allusion to additional
tightening measures as a signal that the bank was ready to use
liquidity management tools to induce more frequent surges in the
cost of lira funding to support the currency.
The central bank had returned to its policy of tight
liquidity management last week in support of the lira after the
currency fell close to the sensitive level of 2.10 against the
"This policy may eliminate an excessive lira weakness, yet
by itself it would not help the lira appreciate unless global
risk appetite improves," said Nilufer Sezgin, economist at
The central bank kept its key one-week repo rate unchanged
at an all-time low of 5.75 percent, where it has been since
August. Overnight lending rates stayed at 11.5 percent, and the
overnight borrowing rate at 5 percent, with required reserve
ratios (RRRs) on lira and foreign currency deposits unchanged.
All 10 institutions polled by Reuters had expected the bank
to leave its key rates and RRRs on hold and as significant was
its decision to keep lira funding - which is has used to prop up
the currency - steady in the coming month.
The policy rate has become less significant since December
when the central bank began funding the market through more
expensive intraday repo auctions on days deemed "exceptional",
notably whenever the lira currency appeared vulnerable.
The bank has focused on managing the exchange rate in its
struggle to bring inflation down to 6.5 percent this year from
current levels of just over 10 percent.
Worried that raising official interest rates could worsen a
slide in economic growth later this year, the bank has opted to
use liquidity management tools to bolster the lira.
After losing close to a fifth of its value against the
dollar last year, the lira has bounced back just over 6 percent
so far this year.
The bank said it would continue to use that flexible
approach and kept funding for its ordinary short-term repo loans
to banks steady at 1-6 billion lira and a ceiling of 5 billion
lira on monthly loans.
(Additional reporting by Seltem Iyigun, writing by Patrick