The lira weakened the most this month and bond yields fell after Governor Erdem Basci said the central bank may cut its inflation forecast, reinvigorating speculation of a rate cut.
The Turkish currency retreated 0.9 percent to 1.8307 per dollar at 4:56 p.m. in Istanbul, the biggest drop since May 30. Its loss today is the second-worst among more than 20 emerging- market currencies, according to data compiled by Bloomberg. The yield on two-year debt slid for a third day, down four basis points to 8.61 percent, the least since October. Yields have slid 70 basis points in the second quarter.
The inflation forecast of 6.5 percent at year-end may be lowered to the bank’s 5 percent official target if the trend in commodity and oil prices continues, Basci said at a conference in Ankara today. The rate of price increases slipped to 8.3 percent last month from a three-year high of 11.1 percent as the average cost of daily funding rose to 9.8 percent in May from 8.3 percent in April.
“The central bank’s statement that it may reduce its inflation forecast gave rise to the view that it will cut rates,” Tufan Comert, a strategist at Garanti Securities in Istanbul, said in an e-mailed note. “This is negative for the lira.”
One-year interest-rate swaps headed for their biggest decline since Feb. 1 to 9.45 percent today, signaling traders are betting on a rate cut. The coming months may see a “serious” decline in inflation, Finance Minister Mehmet Simsek said in an interview with BloombergHT television yesterday.
Crude oil prices have fallen 24 percent this quarter, heading for the biggest drop since the final three months of 2008. Turkey imports almost all of the oil it consumes. The Standard & Poor’s GSCI Spot Index of 24 raw materials has fallen 19 percent from this year’s highest close of 715.52 on Feb. 24.
The central bank lent 2 billion liras ($1.1 billion) today at 5.75 percent in its one-week repurchase agreements auction, the same amount banks are due to repay from last week’s repo auction. It has lent at the lowest policy rate for 18 consecutive days, the longest stretch of cheaper lending since March.
The cost of borrowing in the interbank market fell to 6.93 percent today, the lowest level since Feb. 14 and the eighth day of declines.
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