Bloomberg News

Lira Falls on Interest Rate-Cut Bets, Pares Last Week’s Advance

July 16, 2012

The lira weakened, paring last week’s gain, and bond yields fell as JPMorgan Chase & Co. and Garanti Yatirim Ortakligi (GRNYO) AS said the central bank may cut interest rates at its policy meeting this week.

Turkey’s currency depreciated as much as 0.3 percent and traded down less than 0.1 percent at 1.8119 by 5:48 p.m. in Istanbul, trimming its 0.4 percent gain last week. Yields on benchmark two-year bonds declined 1 basis point to 7.94 percent, which is within four basis points of a 10-month low.

“The Turkish central bank could deliver a 50 basis-point cut in its overnight lending rate” and “is likely to reduce its effective funding rate gradually towards 7.5 percent” from about 8 percent now, Yarkin Cebeci, an Istanbul-based economist at JPMorgan, said in an e-mailed report today. “We assign a 60 percent probability that they keep all rates unchanged and a 40 percent probability that they cut the overnight lending rate.”

The average weighted cost of central bank funding has been 8.35 percent in July, compared with 9.18 percent in June, according to data compiled by Bloomberg. Central bank Governor Erdem Basci varies the rate at which he funds banks between the benchmark one-week repurchase agreements rate of 5.75 percent and the overnight repo rate of 11.5 percent. The monetary policy committee is scheduled to meet on July 19.

“If there’s an interest-rate cut, we can expect a limited sell-off in the lira and for rates to fall toward 7.7 percent, Gizen Oztok Altinsac, an economist at Garanti Yatirim in Istanbul, said by e-mail today. ‘‘A 50 basis-point cut, with the intention of signaling, may be preferred.’’

The central bank will reduce its 6.5 percent inflation forecast for 2012 toward the 5 percent goal when it releases its quarterly inflation report on July 26 , Basci said in a speech in the eastern city of Bursa on July 6.

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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