Turkey central bank cuts rates, raises obligatory reserves

Turkey's central bank cut Tuesday overnight interest rates while raising reserve requirements for commercial lenders, as it juggled supporting growth while avoiding a credit boom.

The bank's monetary policy committee kept the main policy rate unchanged at 5.5 percent.

However it lowered by 25 basis points, or 0.25 percentage points, the overnight rates which form the floor and ceiling for market interest rates.

The overnight borrowing rate was lowered to 4.5 percent and the overnight lending rate to 8.5 percent.

The bank raised lenders foreign exchange reserve requirement from 11.1 percent to 11.5 percent, saying it would withdraw $940 million (705 mn euros) from the market.

"Although the Turkish central bank cut interest rates today, it also raised reserve requirements, so the overall impact on monetary conditions is ambiguous," London-based Capital Economics said in a statement.

Policymakers are under pressure to revive the economy by cutting rates, but they risk rekindling concerns over the current account deficit, it added.

"Today’s moves reflect the bind the Bank is in," they said.

Lower interest rates would support economic growth, which has recently slowed.

Raising the reserve requirements would restrain banks from loaning too much, with the central bank warning of a significant acceleration of credit growth, which is financed mostly by foreign capital inflows.

Although Turkey is narrowing its current account deficit, its need for external financing remains the growing economy's weak spot, along with a big external debt in the private sector.

Turkey has managed to narrow the current account deficit to 6 percent of gross domestic product after a peak of 10 percent of GDP in 2011, when consumer price inflation had also soared above 10 percent.