Lira Gains Most in Month on Turkish Central Bank’s Pledge to Halt Drop

The lira strengthened the most in a month and bond yields declined after central bank chief Erdem Basci indicated he’s ready to take steps to halt the currency’s retreat.

The lira gained 1.1 percent to 1.6731 per dollar at 6:30 p.m. in Istanbul after Basci said at a news conference in Ankara the currency is “definitely not overvalued’’ and that the bank has the instruments to prevent further declines. Turkey’s currency earlier jumped as much as 1.3 percent, the biggest intraday advance since June 29. Yields on benchmark two-year bonds fell 14 basis points, or 0.14 percentage point, to 8.81 percent, according to a Royal Bank of Scotland Group Plc index.

Basci’s statement suggests the central bank “is ready to take action” to support the currency “in case the lira weakens further,” Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul, wrote in a note to investors. “It was very important to hear Governor Basci saying that the level of the currency at the moment is enough to lead to a correction in the external balances, and that they would not like to see further weakness as this would lead to inflationary pressures.”

Turkish authorities are battling a record current-account deficit as an economy growing at an annual 11 percent in the first quarter of 2011 draws in oil and consumer goods. The lira has lost 7.6 percent versus the dollar this year, the biggest decline among more than 20 developing-nation currencies, on concern its policy of controlling inflation through increases in banks’ reserve requirements while leaving interest rates at a record low won’t curb the gap.

‘More Cautious’

“The market will likely be more cautious in testing the lira,” JPMorgan’s Cebeci wrote. “However, an upside surprise in inflation or continued strength in loan demand and private consumption could unnerve the investors easily and swiftly.”

The bank left its inflation forecast for this year unchanged at 6.9 percent. Inflation in 2012 will be 5.2 percent, and 5 percent in 2013, Basci said.

Basci also said there is no risk of a “hard landing” for the country’s economy. His remarks contradict a Standard and Poor’s assessment yesterday.

Turkey’s fiscal position is “too accommodative” and it’s difficult to predict what decision S&P officials may make regarding Turkey’s future credit rating and outlook, Frank Gill, an analyst at S&P, said in a telephone interview.

The central bank is seeking to curb the pace of lira depreciation more than the level of the lira, Manik Narain, an emerging-market currency strategist with UBS AG in London, wrote in a note to clients.

“Further measures to support the currency are unlikely to be immediately forthcoming unless the lira were to sell off sharply once more,” Narain wrote. Contracts in the options market are suggesting a 70.1 percent chance that the currency will weaken to 1.75 by the end of 2011.

Deficit

The current-account deficit may widen to 10.5 percent of economic growth this year and the expansion of the economy may slow to 2.5 percent next year from 8.7 percent in 2011, the International Monetary Fund said last week.

“We have a more pessimistic assessment of the domestic risks than the central bank, domestic and external risks look significant to us,” Robert Beange, a strategist at RBC Capital Markets in London, said in e-mailed comments.

The benchmark stock index ISE National 100 climbed 2.2 percent to 62530.88 at the 5:30 p.m. close.

“We are also worried by the possibility of easier monetary policy should the external situation worsen,” Beange said. “However, his comment on potentially supporting the lira is of most significance and is very positive.”

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

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

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