The lira fell from a 10-month high on speculation of action by Turkey’s central bank to curb the currency’s gain this year.
The lira weakened 0.4 percent against the dollar to 1.7604 at the 5 p.m. close in Istanbul, declining from its highest level since February. It has appreciated 1.3 percent this year, the second-biggest advance among emerging-market currencies in Europe, the Middle East and Africa after the Romanian leu, according to data compiled by Bloomberg. Yields on two-year notes slid four basis points, or 0.04 percentage points, to 5.96 percent.
“A strong lira is the least preferable thing for the central bank,” said Ercan Erguzel, an economist at Denizbank AS (DENIZ) in Istanbul, said in in e-mailed comments. “If the central bank really believes that the lira has appreciated too much, then it may consider interest rate cuts and if this is not enough, it may resort to different instruments.”
The central bank will continue to monitor its Real Effective Exchange Rate Index, or REER, to judge the volatility and value of the lira, central bank Governor Erdem Basci told a news conference in Ankara on Dec. 25. The index is below the desired 120 level, Deputy Central Bank Governor Turalay Kenc said on Euromoney roundtable discussion in Vienna on Jan. 15.
The lira touched 2.0470 yesterday against the euro-dollar basket on bets Moody’s Investors Service will raise Turkey’s credit rating to investment grade. Moody’s said in November the country was the only nation in Europe it rated with a positive outlook. Moody’s did not respond to phone calls made to the company’s offices in London yesterday, requesting comment.
The lira’s appreciation to 2.0 against an equally-weighted euro and dollar basket “will disturb the central bank,” Erguzel said.
Excessive currency appreciation increases “systemic risk and can have a damaging effect on macroeconomic and financial stability,” Basci said on Dec. 25.
The governor has used an interest-rate corridor since October 2011 to influence the cost of funding for commercial banks daily, controlling money flows to curb Turkey’s current-account deficit. He lowered the benchmark repurchase rate, also known as the lower end of the rates band, in December by 25 basis points to a record 5.5 percent.
“While the current level of the lira is unlikely to be strong enough to elicit an aggressive reaction from the central bank, we still think that a measured 25 basis point cut to the lower end of the interest rate corridor is likely at next week’s Monetary Policy Committee meeting as a precaution against ongoing capital inflows,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS (TEBNK) in Istanbul, said in an e-mailed note.
Fitch Ratings upgraded Turkey’s credit rating to BBB- on Nov. 5, its lowest investment grade, spurring a rally in the nation’s assets last year. Moody’s rates Turkey at Ba1, one level below investment grade. Standard & Poor’s rates the country two levels below that threshold.
Turkey’s rate-setting committee will meet on Jan. 22.
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