April 18, 2012 / 11:51 AM / in 6 years

UPDATE 1-Turkish c.bank holds fire, warns of tighter policy

ISTANBUL, April 18 (Reuters) - 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 oil prices.

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 monthly policy meeting kept the 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 lira rose after the statement.

“The inflation may stand at higher levels than expected in the short term due to rises in energy prices,” the bank’s policymaking committee said.

“The committee will not allow the temporary rises in inflation to deteriorate the inflation outlook. In this sense, the monetary tightening may be implemented more frequently.”

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.

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 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.

The bank has largely relied on such liquidity management as a shield against inflation since late last year, worried that raising official interest rates could worsen a slide in economic growth later this year.

But dealers said the overall tone to its statement on Wednesday remained hawkish, supporting the currency.

“The hawkish tone in the statement contributed to the lira’s recovery. However, this would support lira only limitedly as the global outlook turns slightly into negative,” said Tufan Comert, a strategist at Garanti Securities.

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. (Reporting by Seltem Iyigun; writing by Simon Cameron-Moore and Patrick Graham)

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