Turkey's central bank kept its policy rate steady at 5.50 percent but continued to shift its daily interest rate corridor downwards to support growth but tightened its reserve requirements to slow down the growth of credit from a continuing inflow of capital that is putting upward pressure on the Turkish lira.
The Central Bank of the Republic of Turkey (CBRT), which started narrowing its interest rate corridor in September 2012, cut the overnight lending rate, which forms the ceiling of the corridor, by 25 basis points to 8.50 percent and the overnight borrowing rate, which forms the floor, to 4.50 percent.
"The Committee has indicated that credit growth displays a significant acceleration amid
strong capital inflows," the central bank said following a meeting of its monetary policy committee.
"Accordingly, it was deemed appropriate to implement a measured tightening through reserve
requirements, while delivering a limited downward shift in the interest rate corridor," it added.
The reserve requirements were raised by 25 basis points for lira deposits for up to one year but less than three years and by 50 basis points on most foreign currency deposits, effective March 1, draining some $940 million from the market.
The central bank said domestic demand remained moderate "while exports continue to increase despite weak global activity," which is narrowing the current account deficit.
The central bank also said the daily funding of liquidity via one-week actions would be set between 0.2 and 6.5 billion Turkish lira until the policy committee's next meeting and the upper limit for one-month repo auctions was set at 2.5 billion lira.
In the event that liquidity conditions change, the bank said it would provide funds beyond the limits.
"Ongoing uncertainties regarding the global economy necessitate the monetary policy to
remain flexible in both directions," the CBRT said.
Turkey's inflation rate rose to 7.31 percent in January, up from December's 6.16 percent, but the bank said in its statement that it expects inflation to continue to decline.
The central bank targets annual inflation of 5.0 percent, the same as in 2012 when inflation averaged 6.2 percent, down from 10.4 percent in 2011.
While narrowing and shifting the interest rate corridor downward last year, the CBRT kept the benchmark one-week repo rate steady until December when it was cut by 25 basis points, the first cut since August 2011.
Turkey's Gross Domestic Product rose by 0.2 percent in the third quarter from the second quarter for annual growth of 1.6 percent, down from 3.2 percent in the second and 2.3 percent in the first quarter.
The economy is estimated to have expanded by 2.5 percent last year, down from 8.5 percent in 2011. The central bank forecasts 2013 growth of 4 percent or higher.