April 30, 2019 / 8:27 AM / 5 months ago

UPDATE 3-Turkey's central bank says hikes possible, plays down reserve concerns

(Adds comment, context, updates lira)

By Ezgi Erkoyun and Ali Kucukgocmen

ISTANBUL, April 30 (Reuters) - Turkish Central Bank Governor Murat Cetinkaya said on Tuesday interest rate hikes remained an option if inflation unexpectedly jumps, and he defended the bank’s stable of reserves against concerns that have grown as the lira tumbled in recent weeks.

He also said the bank was leaving its inflation forecasts unchanged at 14.6 percent for end-2019 and 8.2 percent next year as he presented the bank’s quarterly inflation report, pledging to use all tools available to boost confidence in the currency.

The assurances received only a lukewarm welcome by investors who were looking for more detail on a drop in the net foreign-exchange reserves that could be used to head off another currency crisis, and the lira slipped a bit before recovering.

Last year’s crisis tipped the Turkish economy into recession. The lira has dropped another 12 percent this year due in part to worries that the central bank would tighten policy too soon to sustainably lower annual price rises, which was 19.71 percent in March, four times higher than target.

Last week, the central bank left its key interest rate unchanged at 24 percent but in its statement dropped a previous reference to possible further tightening if needed, a dovish shift that hit the lira.

Cetinkaya talked down the significance of the change in the statement’s wording, saying it “reflected a structural approach more than a short-term signal of direction.”

“If upward risks (to inflation) materialise, additional tightening can be provided the moment that the monetary policy committee sees a need on this issue,” he said.

The lira weakened as far as 5.9850 against the dollar during the presentation, its weakest since Oct. 12, but it rebounded partially to 5.9670 afterwards.

INFLATION FEARS

Investors are increasingly concerned about inflation, which peaked at a 15-year high above 25 percent in October in the wake of the crisis that wiped nearly 30 percent off the lira’s value last year.

Piotr Matys, emerging markets forex strategist at Rabobank, said Cetinkaya’s comments indicate the central bank realized it was a mistake last week to remove its firm commitment to raise rates.

“It’s all confusing. At a time that the central bank’s credibility is not particularly high, policymakers cannot afford to send such confusing signals,” he said.

The latest bout of lira weakness began in late March due to strained U.S. diplomatic ties, challenges by President Tayyip Erdogan’s AK Party in April to election results in Istanbul, and a drawdown in the central bank’s reserves, which on a gross level stood at $75.57 billion and at $26.9 billion on a net level on April 19.

Yet Cetinkaya said recent fluctuations in the bank’s forex reserves were not abnormal. He added that it was important to look at medium term trends when looking at reserve levels, and there was no deterioration in any parameter of reserve effectiveness.

Analysts said the governor’s comments did not fully convince markets.

“The statements made were not able to fully remove the markets’ question marks regarding the net reserves,” said Muammer Komurcuoglu, economist at Is Investment.

Turkey’s central bank ramped up its use of swaps to boost overall reserves last month, bank data showed last week. Cetinkaya said the bank knew the impact of swap transactions on reserves, and that the increase in swap transactions was carried out to support the market in the face of a market anomaly.

He added the bank would decisively use all tools available to bring down inflation in line with targets, forecasting inflation would fall to single digits in the second quarter of 2020. (Additional reporting by Jonathan Spicer and Sarah Dadouch; Writing by Daren Butler Editing by Dominic Evans and Janet Lawrence)

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