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The Central Bank of Turkey (CBT) insisted on February 20 that it views its move to cut interest rates and raise reserve requirements the previous day as tightening monetary policy, aimed at stemming capital inflows while suppressing credit growth. It added that it could repeat the action in the coming months.

The CBT surprised somewhat on February 19 as it lowered its overnight borrowing and lending rates by 25 basis points to 8.5% and 4.5% respectively. However, it kept its "benchmark" rate unchanged at 5.5%, and also hiked reserve requirements on banks again.

However, at its regular meeting with economists following the policy announcements, it said it sees the overall effect of the moves to be a tightening of conditions - specifically, the cut to lending rates aims to deter hot money inflows, which threaten to push the value of the lira sharply. Meanwhile, in tandem with the raised requirements on banks, it also should work to hold back consumer loan growth, which is growing sharply once again.

The regular meeting with economists has been held since 2010, when the CBT introduced an unorthodox policy mix, including the adjustable interest rate corridor, which is managed on a daily basis.

"The CBT is now probably at the front of the pack in running the most complicated monetary policy the world has ever seen," argues Tim Ash at Standard Bank, "at least for a central bank which argues that it still targets inflation (now amongst other things) with multiple targets, intermediate targets and tools, and it all gets pretty complicated to figure out what exactly they are trying to do after each policy meeting."

However, the meeting confirmed that the CBT squarely views the risks to the economy very much on the upside, with worries dominated by likely loan growth, inflation and speculative capital inflows.

Ankara spent 2012 attempting to engineer a "soft landing" from the 8.5% GDP expansion it saw the previous year, in a bid to slash the current account deficit that was being driven by domestic demand. It managed that reasonably well, reducing the imbalance from over 10% of GDP at the start of the year to 6.1% by the end. The level of exposure the financing of the deficit gives Turkey to potential shocks in the Eurozone banking sector is the major issue blocking an upgrade from the ratings agencies.

Despite consistent calls from some government officials to ease policy, the CBT remained resistant throughout last year, and now suggests the concern is actually another bout of rapid growth. It admitted to the meeting that 2012 growth was weaker than it expected, but underlined that visible recovery in PMI readings supports anticipation of accelerating economic activity in 2013.

Analysts are not convinced the February action will be enough to stem the building momentum however. Erste writes: "In our view, the tightening impact of the decisions will be limited and credit growth will probably continue hovering above the CBT's 15% guidance. Nevertheless, unless credit growth surges significantly from the current trend, we do not anticipate the CBT to take more aggressive steps. Gradual RRR hikes may continue along with gradual downward shifts in the interest rate corridor."