(Repeats story that ran on Feb 8; no changes to text)
* Bank has used liquidity moves to drive up borrowing costs
* Current stance "not a return" to daily policy shifts
* Bank in difficult balancing act with Erdogan, investors
* Investors want outright rate hikes to rein in inflation
* President presses for cheaper credit to pump up economy
By Nevzat Devranoglu
ANKARA, Feb 9 Turkey's central bank will stick
with unorthodox measures to keep borrowing costs at five-year
highs at least until inflation peaks this year, according to
people familiar with its thinking, despite sharp criticism from
The bank has long puzzled markets with a complex system of
setting policy through multiple interest rates but it ratcheted
up the difficulty last month by introducing new liquidity
measures to shore up the sagging lira currency.
While investors would prefer more decisive and transparent
rate increases, the moves appear to be working. The weighted
average cost of funding climbed to 10.37 percent last
week, the highest since the middle of 2012, and the lira has
stabilised, with some help from the easing U.S. dollar.
The central bank is now likely to stay the course and keep
funding costs stable until inflation crests, anticipated in or
around April, according to three people who declined to be
identified because of the sensitivity of the matter.
"Do not expect the central bank's policy stance to change on
a daily basis," one of them said. "These new measures will
continue for some time, perhaps until April or May, when
inflation will be at its highest."
Annual inflation, which was running at 9.22 percent in
January, is expected to reach double-digits in the coming months
but slacken off in the second half, economy officials have said.
"When we take the required reserves held by banks into
consideration, apart from insignificant changes of a few points,
we don't see any changes to the interest rates making up the
central bank's funding composition," another person said.
Once seen as one of the world's most promising emerging
markets, Turkey is no longer a darling of investors.
They worry about political uncertainty, insecurity including
Islamist militant violence and a Kurdish insurgency, a slowdown
in the $718 billion economy and the central bank's ability to
Turkey's central bank has an unenviable task.
It must try to balance the demands of investors, who want
substantial rate rises to tame inflation, with those of
President Tayyip Erdogan, who has declared that he is an "enemy"
of interest rates and called for cheaper credit to stimulate
consumption and revive the economy.
The reliance on liquidity moves, such as cutting off funding
taps, has deepened investor concern that the bank is loath to
raise rates outright because of pressure from Erdogan.
The president says the bank is independent but that he is
free to criticise it.
"Undue influence on the central bank has prevented it from
hitting its inflation target," ratings agency Fitch said last
month in cutting Turkey's sovereign debt rating to "junk". The
central bank has long set a target of 5 percent annual
Some market players expect Erdogan's criticism of interest
rates to become more frequent in the run-up to an April
referendum that he counts on giving him the broad presidential
powers - authoritarian, his foes fear - that he has long sought.
Divisions among Turkey's economy team have also hampered
monetary policy and unsettled investors.
Some officials, keen to preserve Erdogan's reputation for
delivering strong growth, insist Turkey cannot afford rate
increases with the economy slowing at its sharpest pace in
almost a decade. Others disagree and say politicians should be
quieter about monetary policy, even if this means higher rates
to steady the lira and restrain inflation.
At its most recent policy-setting meeting last month, the
central bank raised two of its interest rates, but kept its
benchmark one-week repo rate on hold at 8 percent.
JURY STILL OUT
"The jury is still out on whether this is going to be
enough. They've gotten lucky essentially over the last few weeks
with the markets settling down and taking a more (emerging
markets)-positive stance," said Manik Narain, a UBS strategist.
"The true test is going to come if the dollar starts to
appreciate again or, more broadly, (when) you get volatility
rising in EM."
After double-digit declines in 2015 and 2016, the lira was
hammered in January - falling as much as 10 percent at one point
in the month. While it has recouped some losses, it is still one
of the worst performing emerging market currencies this year.
It was at 3.7205 on Wednesday, well off the record low of
3.9417 hit last month.
The bank's unusual liquidity measures have brought
suggestions from Turkish market players that it is reviving some
of the policies of ex-Governor Erdem Basci, the architect of its
so-called "interest rate corridor" of multiple rates.
Under Basci, there were relatively wide differences in the
weighted average cost of funding from day to day. However, Murat
Cetinkaya, the current central bank governor, has said there
would be no return to the "wide corridor" of old.
"Exceptional daily measures like in the past, such as tight
one day and loose the other, should not be expected," said the
first person versed on central bank thinking. Still, it remains
to be seen whether that will be enough to appease investors.
"Their actions are betraying a lack of conviction," Narain
of UBS said, adding that an outright rate hike would reassure
markets that the bank was serious about tackling inflation.
"It's one thing doing it for three days, it's another doing
it for three months or longer and really sending a signal they
will do whatever it takes to bring inflation back down."
(Writing by Tuvan Gumrukcu; editing by David Dolan and Mark