March 27, 2012 / 2:05 PM / 6 years ago

UPDATE 2-Turkish holds rates, takes hawkish tone

* 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 (Reuters) - 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 inflation.

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 percent.

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 Generale.

“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 Neil Shearing.

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 fully used.

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)

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