Bloomberg News

Lira Slides to Record, Yields Surge on Concern Over Bank Policy

December 29, 2011

Dec. 28 (Bloomberg) -- The lira hit a record low against the dollar and yields surged after the central bank said it will stop lending at the benchmark interest rate on some days, raising uncertainty about monetary policy.

The lira weakened as much as 1 percent to 1.9191 and fell 0.9 percent to 1.9159 at 6:00 p.m. in Istanbul, increasing this year’s losses to 19.4 percent in the worst performance among more than 20 emerging-market currencies tracked by Bloomberg. Yields on benchmark two-year bonds jumped 27 basis points, or 0.27 percentage point, to 11.07 percent, a Royal Bank of Scotland Plc index of the securities showed, the highest level since July 2009.

Central Bank Governor Erdem Basci said the bank may stop lending each day at 5.75 percent with weekly repurchases and instead lend at higher rates in a later auction on “exceptional” days. The bank will seek to influence the exchange rate by how it provides funding to banks, deciding on its policy daily, Basci said in a speech in Istanbul today. The rate at which it lends to banks on those days will be higher and set at an auction, Basci said in a speech in Istanbul today.

Turkish central bank policy “has spurred confusion and fear,” said Baris Karaayvaz, a trader at Turkiye Garanti Bankasi AS.

“We again fail to understand the governor’s comments,” Karaayvaz said in emailed comments from Istanbul. “The bank says, leave it to me to decide what is an exceptional day. It says, if I do something extraordinary, than it is an exceptional day.”

Dollar Sales

The bank sold $150 million today, three times the $50 million target it announced two days ago for daily auctions. Turkey’s central bank said it plans to sell $50 million a day in its daily dollar auctions unless there are “exceptional” circumstances. The plan, effective yesterday, will continue until the next monetary policy committee meeting in January. Lenders bid for $263 million today.

“Whenever Basci speaks, he disrupts the market ,” Burak Demircioglu, a trader at EFG Istanbul Securities said in e- mailed comments. “Nothing is clear and this is disturbing the markets. The bank is using tools inconsistent with its statements and this is confusing people.”

The benchmark stock index fell 1.9 percent to 51,553.20, the biggest fall in two weeks.

“The central bank taking on such an active role is counterproductive,” Ozhan Antero Atilla, emerging-market analyst at Danske Bank A/S, said in e-mailed comments. “We will come to a stage where foreign markets will not heed Basci’s comments. The bank acts as if it has to do something whenever the lira moves past 1.90.”

--Editors: Ash Kumar, Steve Bryant

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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