ISTANBUL: Turkey's central bank is expected to cut its overnight lending rate again on Thursday to support a slowing economy but may take steps to control loan growth as inflation concerns resurface.
The Turkish economy was the fastest-growing in Europe last year, expanding 8.5 percent, but weaker domestic demand this year has taken its toll. The government last week trimmed its forecasts for growth in 2012 to 3.2 percent and forecast only a mild pick-up next year.
Tighter monetary policy in late 2011 and early 2012 helped bring down Turkey's high current account deficit and inflation without driving it into a deeper economic downturn. But since July, the central bank has been cautiously easing policy to try to stimulate demand.
At its last monetary policy meeting in September, it cut its overnight lending rate for the first time in seven months by 150 basis points to 10 percent and hinted it could do more to support economic growth.
Eight of nine brokerages and banks in a Reuters poll expected the central bank to cut its lending rate, the upper end of its interest rate corridor, again on Thursday by 50 to 150 basis points.
The bank was also expected to tighten liquidity by marginally increasing its reserve option coefficients, a new policy tool that helps it keep loan growth in check.
Increasing the coefficients means lenders will have to provide proportionally more foreign exchange to the central bank for the lira reserves they elect to hold in foreign currency, draining some of the forex liquidity they could otherwise have used to generate new loans.
"While the narrowing of the corridor would be tantamount to loosening for loans and monetary stance, the increase in reserve option coefficients would signify a limited tightening," wrote Haluk Burumcekci, chief economist at EFG Istanbul.
"In September, the bank cut its overnight lending rate and increased the reserve option coefficients as it expects strong capital inflows towards Turkey. This shows its willingness to control the pace of growth of banking loans while supporting economic growth," Burumcekci said.
Six of the analysts polled expected the bank to raise its forex reserve option coefficients by 0.1 points.
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