Bloomberg News

Turkish Lira Slips to Month Low, Yields Rise on Fitch Outlook

November 23, 2011

Nov. 23 (Bloomberg) -- The lira weakened against the dollar and two-year bond yields rose to the highest level in more than two years as Fitch Ratings cut Turkey’s long-term debt rating outlook, citing risks to economic stability.

The lira fell 0.9 percent to 1.8673 per dollar at 4:45 p.m. in Istanbul, the weakest level on a closing basis since Oct. 19. The yield on two-year benchmark bonds increased 8 basis points, or 0.08 percentage points, to 10.60 percent, according to the Turk Ekonomi Bankasi AS index. Stocks fell 1.9 percent, dropping for a fifth day, to 51,004.16.

Fitch cut Turkey’s foreign-currency rating outlook to “stable” from “positive,” citing an increase in near-term risks in reducing its “large” current-account deficit and “above-target inflation.” The country may be put back on trajectory for an upgrade by managing a “soft landing” after “overheating,” in the first half of the year, driven by bank loans that fuelled double-digit growth, it said.

The central bank kept its benchmark interest rate at a historic low of 5.75 percent today after almost doubling the cost of borrowing for banks last month to combat accelerating inflation and support the lira and manage volatile capital flows amid turmoil from Europe’s debt crisis. The lira has lost 17 percent this year, the second-worst performance after South Africa’s rand among more than 20 emerging market currencies.

The central bank’s statement suggests policy makers will continue to use the “interest rate corridor as its policy instrument,” Selim Cakir and Emre Tekmen, analysts at Turk Ekonomi Bankasi AS, wrote in a report today. “The recent liquidity squeeze has been rather ineffective in containing the lira’s depreciation,” they said.

Funding Costs

Governor Erdem Basci on Oct. 26 announced plans to vary bank funding costs on a daily basis between the one-week benchmark repo rate of 5.75 percent and the overnight rate of 12.5 percent, he said.

Consumer price inflation accelerated to 7.7 percent in October from 6.2 percent, after prices jumped 3.3 percent in the month, the most for nine years. Inflation may end the year at 8.3 percent, exceeding a target of 5.5 percent, before easing at the start of 2012, according to central bank forecasts.

--Editors: Stephen Kirkland, Maria Ermakova

To contact the editor responsible for this story: Aydan Eksin at aeksin@bloomberg.net


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