* Notable deceleration in capital inflows
* Tighter liquidity policy signalled
* Weak global demand, commodity prices contain inflation
(Adds analyst comment)
By Nick Tattersall and Nevzat Devranoglu
ISTANBUL, March 27 (Reuters) - Turkey's central bank
signalled a move away from its focus on protecting the economy
against hot money on Wednesday, hunkering down instead for the
threat of falling capital inflows if the crisis in Cyprus
triggers global risk aversion.
The bank said there had been a "notable" deceleration in
inflows recently and that this, combined with its tighter
liquidity policy, would dampen the credit growth it has spent
much of the past two years trying to keep in check.
In a characteristically complex policy move, the bank cut
its overnight lending rate by 100 basis points on Tuesday to 7.5
percent but held its borrowing and one-week repo policy rates at
4.5 and 5.5 percent, respectively.
At the same time, it more than halved the maximum amount of
liquidity it will provide at its monthly repo auctions, where
the interest rate is set by the market, meaning more lira
funding will be provided instead through its one-week auctions,
where the rate is set by the bank.
This gives it a tighter grip on liquidity conditions,
allowing it to control both the amount and cost of banks' lira
funding more quickly, meaning it can react faster either if the
global environment deteriorates sharply or if the Cypriot crisis
is contained and risk appetite picks up again.
Economists met with the central bank on Wednesday to get a
better understanding of the rationale behind Tuesday's
decisions, the latest moves in what has become one of the
world's most complicated monetary policy mixes.
"The monetary policy committee's decision was surprising and
confusing, which presumably reflects the uncertain capital flow
outlook," said Inan Demir, chief economist at Finansbank.
"Should the Cypriot situation deteriorate and lead to a
recessionary global environment, the central bank would switch
to easing all policy instruments," he said.
"On the other hand, if adverse scenarios do not come to pass
and capital flows reaccelerate, the bank might well continue
lowering the floor of the (interest rate) corridor and hiking
required reserves to fight lira appreciation and loan growth."
Cyprus has agreed a 10 billion euro ($13 billion) rescue
package with international lenders including potentially heavy
losses for bank deposits above 100,000 euros, averting what
European leaders said would have been a chaotic national
bankruptcy that could have forced it out of the euro.
But there is growing concern that the rescue will provide a
template for future euro zone bailouts making private investors
foot the bill, sending the euro to a four-month low on Wednesday
and suggesting the uncertainty is far from over.
MORE RELAXED ON CREDIT GROWTH
Most economists had expected Turkey's central bank to leave
rates on hold and again raise its reserve requirements on
Tuesday, continuing its efforts to control loan growth of close
to 20 percent, above its medium-term target of 15 percent.
The bank has been worried that rampant credit growth could
stoke inflation and that speculative inflows, attracted by its
robust economic growth and hopes for a second sovereign rating
upgrade, could leave the lira over-valued.
But the bank signalled that the environment had changed and
that it was now more relaxed about credit growth against the
backdrop of a more uncertain global economy.
"Credit growth has accelerated in early 2013 due to strong
capital inflows. However, there is a notable deceleration in
capital inflows recently," it said in a presentation on its
website to explain its latest policy decisions.
"The tighter liquidity policy, together with the recent
deceleration in capital inflows should have a dampening effect
on credit growth," it said.
A double-digit rise in exports last year bolstered Turkey's
resistance to the slowdown blighting much of Western Europe, but
a collapse in domestic demand reduced overall growth to 2.5-3
percent from 8.5 percent in 2011.
In response, the central bank has been trying to spur growth
since mid-2012 and embarked on a campaign of cuts in rates in
September. But it is also trying to quell inflation and tame the
current account deficit, the country's main economic weakness.
In its presentation, it said weak global demand and the
outlook for commodity prices were containing inflationary
pressure, but that it would continue to monitor the impact of
growing credit demand on prices.
It said that while the current account deficit was expected
to widen in the short term as domestic demand picks up, its
policies would limit further deterioration beyond that.
(Reporting by Nick Tattersall; Editing by Daren Butler)