Turkey cuts interest rates in effort to stop lira rising too fast

Turkey's central bank cut two of its three main interest rates yesterday.

The move was a bid to prevent speculative capital inflows from boosting its currency too sharply, while also taking steps to cool domestic loan growth.

A healthy economic outlook and the gradual move of each 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 reduced the borrowing rate to 4.5 per cent from 4.75 per cent and the lending rate to 8.5 per cent from 8.75 per cent.

But it kept its one-week repo policy rate, which it cut by 25 basis points in December, unchanged at 5.50 per cent. The bank also raised reserve requirements to keep loan growth in check, increasing the amount of lira and foreign exchange that lenders have to hold with the central bank.

"The measured weakening in the lira is expected to continue as a result of these actions. We expect a steepening in the yield curve," said Ali Cakiroglu, senior investment strategist at HSBC Asset Management in Istanbul.

The lira initially weakened in response to the bank's decisions, easing to 1.776 against the dollar from 1.77 beforehand. The yield on the two-year benchmark bond fell as low as 5.70 per cent after the decision, from 5.77 per cent beforehand.

The bank's complicated policy mix has drawn criticism from international investors and economists in the past, but has largely come up trumps by keeping Turkey growing steadily and robustly at a time when others are not.

But the bank has come under attack from some government ministers who say it has done too little to boost growth.

The economy is expected to have grown just 2.5 to 3 per cent last year, below the government's 3.2 per cent forecast and less than half the pace of 2011, a slowdown that some ministers have blamed at least partly on cautious monetary policy.

Last month, the central bank cut its overnight borrowing rate to 4.75 per cent from 5 per cent and its lending rate to 8.75 per cent from 9 per cent. It also raised its reserve requirements.

* Reuters