Bloomberg News

Turkish Yields, Lira Surge as Central Bank Doubles Funding Cost

October 26, 2011

Oct. 26 (Bloomberg) -- Turkish bond yields and the lira surged after Central Bank Governor Erdem Basci moved to tighten liquidity by effectively doubling interest rates as he sought to support the currency and fight off accelerating inflation.

Yields on two-year bonds rose 33 basis points to 9.95 percent in Istanbul, according to a Turk Ekonomi Bankasi index. The lira strengthened 0.7 percent to 1.7666 per dollar, making it the world’s best-performing currency in the past five days, with a 5.8 percent gain.

The central bank today denied banks access to funding at the benchmark one-week repo rate of 5.75 percent and instead provided it only through the overnight lending rate, at a cost of 12 percent for primary dealers and 12.5 percent for other banks, governor Erdem Basci told reporters in Ankara. The central bank will retain the power to shift rates between those levels, he said.

“From a financing perspective this might be considered a 625 basis-point hike,” Murat Yardimci, head of trading at ING Bank AS in Istanbul, said in an e-mailed response to questions.

The central bank raised its forecast for inflation this year to 8.3 percent from the 6.9 percent it predicted three months ago. The new forecast exceeds the 8.01 percent predicted by economists and executives in the central bank’s last two-week survey on Oct. 20. The policy maker’s inflation goal for this year is 5.5 percent, and it “won’t tolerate” any long-term deviation from that target.

The move is “negative for bonds and positive for the currency,” according to Inan Demir, chief economist at Finansbank AS in Istanbul. The increased flexibility of Turkey’s bank policy will deter investors with a short-term focus, he said. “Clearly, the bank has no interest in being the markets’ darling, and thinks that lack of speculative capital flows will increase the effectiveness of monetary policy making.”

The central bank “will probably keep Turkish lira liquidity even tighter, so bond yields are unlikely to decline much in the short term,” Erkin Isik, a strategist at BNP Paribas’s unit in Istanbul, said in an e-mailed response to questions.

--Editors: Linda Shen, Alex Nicholson

To contact the reporter on this story: Benjamin Harvey in Istanbul at

To contact the editor responsible for this story: Mark Bentley at

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