Bloomberg News

Lira Snaps 4-Day Gain as Bank Holds Rates While Adding Liquidity

March 27, 2012

The lira snapped four days of gains after the central bank kept rates steady and said it will tighten if necessary to control inflation, while at the same time adjusting reserve ratios to give banks extra liquidity.

The Turkish currency fell less than 0.1 percent to 1.7861 per dollar at 4:45 p.m., breaking a four-day rising streak. Bond yields (BENCH) declined for a second day, falling six basis points, or 0.06 percentage point, to 9.48 percent. The bank maintained its interest rate corridor at 5.75 percent to 11.5 percent.

The central bank today doubled the share of lira reserves banks could hold in gold to 20 percent, providing 6.1 billion liras of extra liquidity. At the same time, the bank today tightened liquidity by reducing the amount of funding it provides at its lowest rate, the one-week repo rate of 5.75 percent, to between 1 billion liras ($560 million) and 6 billion liras from a previous range of 3 billion liras to 7 billion liras.

“Today’s monetary policy committee decision is consistent with the spirit of the central bank’s current defensive operational framework, keeping, on the one hand, domestic monetary conditions tight to support the lira and on the other, the macro-prudential measures relatively accommodative to enhance financial stability and support growth,” Goldman Sachs Group Inc. economist Ahmet Akarli said in an e-mailed report.

Current-Account Deficit

Turkey’s current-account gap is the highest in the world at 10.3 percent of the gross domestic product among 60 major economies tracked by the International Monetary Fund. The inflation rate fell to 10.4 percent in February from 10.6 percent in the previous month, while remaining at more than twice the bank’s 5 percent target for the year.

Worsening of the current-account deficit may “increasingly narrow the central bank’s policy options, forcing it ultimately to compromise its consistent growth objective,” Akarli said.

“On balance, we believe the decision will raise the weighted average cost of funding,” Turk Ekonomi Bankasi AS (TEBNK) said in e-mailed comments after the central bank announced its rates decision today.

The central bank will probably keep a “relatively tight monetary policy at least until the third quarter,” Ozgur Altug, chief economist at Istanbul-based brokerage BGC Partners (BGCP), said in an e-mailed note to clients after the bank’s announcement. “Providing lira liquidity to the market is positive for banks and maintaining a relatively hawkish monetary policy stance is also positive for the currency, but it might be slightly negative for bonds.”

Banking Index Rises

The banking index in Turkey rose 0.4 percent after a 1.4 percent jump yesterday, snapping a four-day decline. The lira advanced 1.5 percent, the most among the emerging markets countries, since March 21 when central bank Governor Erdem Basci pledged a policy of “controlled tightening.”

“The bank will resort to tightening until inflation is reduced to the 5 percent target,” the governor said on that day. The central bank will restrain lending growth and may also adjust its reserve requirements regime, he said.

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

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


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