Turkish yields rose for a third day on speculation that the central bank will raise reserve requirements for lenders at its meeting next week.
Yields on two-year benchmark notes pared this year’s biggest decline among emerging markets as banks’ loans rose 19.2 percent in the 12 months to Feb. 1, according to banking regulator data published yesterday, exceeding the central bank’s 15 percent goal.
The central bank increased last month proportion of reserves banks must set aside for their lira-denominated deposits and other liabilities of as long as 1 year by 25 basis points and by 50 basis points for foreign-currency denominated liabilities of as long as 3 years.
“We are still seeing solid credit growth,” Bugra Bilgi, a hedge fund manager at Garanti Asset Management in Istanbul, said in e-mailed comments. “We may see reserve requirement increases next week.”
Yields on two-year notes rose 5 basis points, or 0.05 percentage point, to 5.80 percent by 4:27 p.m. in Istanbul, highest level in a week. The lira appreciated 0.2 percent against the dollar to 1.7732, extending this year’s advance to 0.6 percent.
Central bank Governor Erdem Basci has managed the lira and Turkey’s credit growth by adjusting interest rates daily through a corridor he introduced in October 2011. The governor reduced the overnight lending and borrowing rates by 25 basis points each to 8.75 percent and 4.75 percent, respectively, on Jan. 22. A “measured rate cut to the interest-rate corridor or policy rate is possible if the REER appreciates excessively,” Basci said Jan. 29.
The Real Effective Exchange Rate Index rose to 120.16 in January from 118.08 in the previous month. A reading of 120 or above signals excessive currency strength, according to the central bank, which will announce the reading for February on March 5.
“It looks hard for the yields to fall below 5.70 percent because I don’t expect a cut at the lower end of the interest rate band,” Bilgi said. An increase in banks’ reserve requirements and maintaining the lower end of the interest rate band would spur selling in shorter maturities of lira debt, he added.
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