Turkey holds rate, but ups limit for lira reserves in FX

    Turkey's central bank kept its benchmark one-week repurchase rate steady at 5.75 percent but eased its policy stance slightly by again raising the portion of lira reserves that banks can hold in foreign currencies and gold, a move that was expected by markets.

    The Central Bank of the Republic of Turkey also said in a statement following a meeting of its Monetary Policy Committee that it kept its interest rate corridor unchanged but that it "may be narrowed gradually in the forthcoming period."

     The bank introduced the interest rate corridor last year to help ward of speculative attacks and control inflation. Interest rates vary daily within the corridor, which has a lower limit at 5 percent and an upper limit of 11.5 percent.

    Domestic demand in Turkey continues to show a moderate recovery and exports also continued their upward trend, despite the weak global economic outlook, the bank said, echoing its statement from last month. Inflation is still expected to ease but it remains above target and this requires a cautious policy stance, the bank added.

    The central bank has over the last few months raised the limit for FX reserves, such as U.S. dollars and euros, that banks can use to meet their Turkish lira reserves. In May the FX reserve limit was raised by 5 basis points to 45 percent, then in June it was raised to 50 percent and in July to 55 percent.

    The bank has now raised the FX limit to 60 percent, a move that would help provide $2.8 billion in additional market liquidity, the bank said, adding this takes effect on Aug. 17. 

    Turkey's financial markets were higher on Wednesday on speculation that the central bank would continue its policy of increasing the upper limit of the FX portion of lira reserves. It costs banks less in borrowing costs to fund their reserves in euros or U.S. dollars than lira. 

    The bank also raised the amount of gold that banks can use to maintain their reserve requirements to 30 percent from 25 percent. This will be effective from Aug. 31, the bank said.

    Turkey's annual inflation rate rose to 9.1 percent in July from 8.87 percent in June. The bank targets annual inflation of 5 percent but it has forecast an inflation rate of 6.2 percent end-2012.

    Turkey's economy grew by 3.2 percent in the first quarter from the same quarter last year, down from a 5.2 percent annual growth rate in the fourth quarter. In 2011 GDP grew 8.5 percent.

    The benchmark one-week repo rate has been steady at 5.75 percent since July last year, when it was cut by 50 basis points. 
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