* Overnight borrowing, lending rates cut by 25 bps
* One-week repo rate stays at 5.50 percent
* Required reserves raised to control loan growth
* Further rate cut possible
(Adds analyst comment, details on market reaction)
By Seda Sezer and Seltem Iyigun
ISTANBUL, Feb 19 Turkey's central bank cut two
of its three main interest rates on Tuesday in a bid to prevent
speculative capital inflows from boosting the lira currency too
sharply, while also taking steps to cool domestic loan growth.
A healthy economic outlook and the gradual move of its
credit ratings to investment grade has boosted the appeal of
Turkish assets, forcing officials to take steps to battle a
flood of cheap cash from central banks in the developed world
that threatens to knock its economy off balance.
The bank shaved a quarter point off its borrowing and
lending rates but kept its central one-week repo policy rate,
which it cut by 25 basis points in December, unchanged at 5.50
It also raised reserve requirements to keep loan growth in
check, increasing the amount of lira and forex that lenders have
to hold with the bank as it strives to keep a lid on Turkey's
current account gap while supporting growth and capping the
"The central bank is now probably at the front of the pack
in running the most complicated monetary policy the world has
ever seen," said Timothy Ash, head of emerging markets research
at Standard Bank.
"The combo of lower policy rates to try and deter hot money
inflows and prevent the over appreciation of the lira, and macro
prudential policy to counter the impact on domestic credit
The lira weakened in response while two-year
Turkish bond yields sank 13 basis points to
5.64 percent, a tick away from a record low. Added to earlier
moves, the rate changes brought the overnight borrowing rate and
the lending rate to 4.5 percent and 8.5 percent respectively.
All 12 economists in a Reuters poll had expected it to keep
its policy rate on hold at 5.50 percent, while five said they
were expecting the bank to trim both ends of the interest rate
corridor by 25 basis points.
Eleven had forecast a rise in lira required reserves.
The complicated policy mix has drawn criticism from
international investors and economists in the past, but the bank
has largely come up trumps by keeping Turkey growing steadily
and robustly at a time when others are not.
The bank said a rebalancing of the economy was on track with
exports continuing to rise and domestic demand following a
moderate pace, but said credit growth had accelerated
significantly amid "strong" capital inflows.
"We are seeing a dovish bias on the side of the rates
corridor, but also a more prudent bias from the standpoint of
reserve requirements," said Benoit Anne, head of emerging
markets strategy at Societe Generale.
"It's a pretty credible policy mix."
Still, the bank has come under attack from some government
ministers who say it is doing too little to boost growth.
The economy is expected to have grown just 2.5-3 percent in
2012, below the government's 3.2 percent forecast and less than
half the pace of the previous year, a slowdown some ministers
have blamed partly on cautious monetary policy.
In November, the bank said it would cut interest rates in a
measured way if the real exchange rate reached 120-125 on an
index measuring the weighted average of domestic prices relative
to prices of its trade partners.
The rate rose to 120.16 in January, although the lira has
since weakened against the dollar.
"The (central bank's) priority is likely to remain on the
financial stability side in the near term," said Sengul
Dagdeviren, senior vice president at ING Bank.
"(That) means lower overnight borrowing rates, to the extent
real lira exchange rate upward pressure remains, and higher
(Editing by Nick Tattersall and Patrick Graham)