Turkey Yields Drop 4th Day as ‘Extra Tightening’ Cut From Policy

Turkish bond yields declined for a fourth day to the lowest in more than 10 months after the central bank omitted a reference to “extra tightening” in a statement it released after leaving interest rates unchanged.

Yields on two-year benchmark debt fell eight basis points, or 0.08 percentage point, to 7.75 percent, the least since Sept. 6. The bank held its benchmark one-week repo rate at 5.75 percent and the overnight rate at 11.5 percent at a policy meeting today.

Turkey’s inflation has slowed from a 3 1/2-year high in April as the economy shrank in the first quarter, providing room for policy easing. Gross domestic product shrank 0.4 percent in the three months, the first contraction in three years. Capacity utilization slid to 74.6 percent in June from 76.7 percent a year earlier, according to a central bank report June 25, indicating the output gap in the economy is widening.

“The monetary policy committee has dropped” the reference to “additional tightening compared to the previous release in June, which is positive for the market,” Ibrahim Aksoy, an economist at Seker Securities in Istanbul said in an e-mailed note.

The bank added a phrase saying it would preserve flexibility in monetary policy given uncertainty in the global economy, supporting speculation of a rate cut later this year. The yield on two-year bonds has dropped to 72 basis points this month.

Policy Moves

“We expect the Turkish central bank to ‘officially’ cut the upper level of the interest rate corridor by 100 basis points from 11.5 percent in the second half,” Aurelija Augulyte, an analyst at Nordea Markets in Copenhagen, said in an e-mailed note.

Governor Erdem Basci spurred expectations of a cut in the 11.5 percent overnight rate when he said on July 6 the central bank may reduce its inflation estimate for 2012 toward 5 percent from 6.5 percent.

The proportion of lira reserves lenders keep with the central bank in foreign exchange was increased by 5 percentage points to 55 percent today. The change, effective from Aug. 3, may add $2.9 billion to the bank’s reserves and brings an additional 2.8 billion liras ($1.6 billion) to the market, a statement on the bank’s website said today.

Turkey’s central bank varies its funding rate daily, maintaining borrowing costs within a 5.75 percent to 11.5 percent interest-rate corridor introduced last year to control inflation and rein in the current-account deficit.

The lira weakened 0.2 percent to 1.8055 per dollar, the first time in five days.

To contact the reporters 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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