Turkey's Central Bank left its policy rate at a record low on Thursday and took a new dovish tone, saying steps to slow demand were working and promising to loosen policy if debt woes in developed countries stalled growth.
In a statement which analysts said showed a departure from its former "tightening" stance, the bank added it may gradually narrow the interest rate corridor if global growth worries continue to effect risk appetite negatively.
The bank at its monthly monetary policy committee meeting left the one-week repo rate at 6.25 percent, while the overnight borrowing rate remained at 1.5 percent and the overnight lending rate stayed at 9 percent.
All 21 analysts in a Reuters poll forecast that rates would be left on hold.
"The Committee has decided it would be appropriate to gradually narrow down the rate corridor if worries regarding public debt in some European countries and global growth continue to hit risk appetite," the bank said in a statement.
The corridor is the difference between its borrowing and lending rates. "It was also stated that using all policy tools for loosening could come on to the agenda if problems in developed economies deepen and domestic economic activity enters a process of stagnation," it added.
Deputy Economy Minister Ali Babacan said this week Turkey should prepare for negative scenarios in case the United States and eurozone were unable to resolve their debt crises.
Turkey depends on billions of dollars of foreign funds to finance its record current account deficit, which the IMF estimates could hit 10.5 percent of GDP this year. Last year the current account deficit stood at around 6.7 percent of GDP. Analyst Hakan Aklar at AK Invest said the bank's statement showed a radical change in its base case scenario.
"This statement shows monetary policy will not be restrictive anymore," he said.
Earlier this month in one of its clearest messages to the market so far this year, the bank said a slowdown in domestic demand had reduced the need for monetary tightening and the general inflation outlook was positive.
The comments prompted many analysts who had expected the bank would have to raise rates by the end of the year to row back on their rate hike calls. Economic growth hit 11 percent in the first quarter in Turkey but is seen slowing to around 7 percent in the second quarter and 6 percent for the full year, above an official government forecast of 4.5 percent.
"The central bank's views on the Turkish economy and global developments validate the expectation that the Bank does not plan to hike its policy rate soon. On the contrary, the bank clearly indicated that it might be forced to ease all monetary policy instruments," said economist Ozgur Altug at BGC Partners.
After the central bank statement the yield on the benchmark May 15 2013 bond fell to 8.65 percent from a previous 8.81 percent. The lira traded at 1.6710 to the dollar after earlier on Thursday sliding to 1.6750, its weakest level since March 2009. Altug said the bank's statement was positive for bonds but could prove negative for the lira, which has lost around 7 percent of its value to the greenback since the start of the year, due to doubts over the bank's policy and alarm at Turkey's external deficits.
Since late 2010 the central bank has pursued an unorthodox monetary policy aimed at tackling the surging current account deficit. It comprised lower interest rates to deter inflows of hot money inflating the lira alongside higher required reserve ratios for banks to cool lending and ensure an overall tightening effect.
The policy has attracted fierce criticism. Persistently high credit expansion at around 35 percent on the year has led many to question the policy and prompted fears that Turkey risks overheating and falling behind the curve in fighting inflation. June inflation helped ease some pressure on the central bank however as consumer prices fell 1.43 percent on the month, the largest monthly fall since 1994, for an annual rise of 6.24 percent.
The bank forecasts year-end inflation at 6.9 percent although it targets 5.5 percent. Analyst see year-end inflation at 7.33 percent according to the latest CPI expectations survey by the bank.
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