Lira Weakens to Lowest This Month After Basci Signals Loosening

The lira slid to the weakest level this month after the central bank said it would lower the upper limit of its interest-rate corridor to help support economic growth.

The lira depreciated 0.4 percent to 1.8173 per dollar at 11:23 a.m. in Istanbul, the lowest since July 30. The currency declined for the fourth day, the longest losing streak since May 18, according to data compiled by Bloomberg.

“There’s a knee-jerk reaction,” Benoit Anne, chief strategist for emerging market research at Societe Generale SA, said in an e-mailed response to questions from London. The central bank is turning dovish and it may start hurting the lira a bit. But I’m not too worried’’ as the sell-off may not last very long, Anne said.

The central bank will slowly bring the cost of credit down because the economy has cooled and the risk of external growth shocks is increasing, Basci told reporters in Ankara on Aug. 25. Turkey’s economy grew an annual 3.2 percent in the first quarter, the slowest rate in three years, compared with a government goal of a 4 percent expansion for 2012.

The currency weakened 1.1 percent this month, the worst performance in emerging Europe, the Middle East and Africa after the South African rand, which dropped 1.9 percent. It reached a record low of 1.9219 per dollar on Dec. 28, prompting Basci to intervene in the currency market to sell dollars.

Yields on two-year benchmark lira bonds fell two basis points, or 0.02 percentage point, to 7.63 percent, declining for the third day.

Funding Rate

The central bank introduced its interest-rate corridor in October, altering the rates at which it lends to banks between 5.75 percent and 11.5 percent on a daily basis. The average lending rate fell to 6.43 percent on Aug. 27 from as high as 8.74 percent in July and 11.93 percent in January.

“This policy stance discouraged the carry trade investors,” Alper Ozsarac, a currency trader at Turk Ekonimi Bankasi AS in Istanbul, said in e-mailed comments. “The central bank prefers looser monetary policy since the beginning of August and the average funding rate decreased significantly.”

The central bank is watching the lira’s performance against a basket of dollars and euros and doesn’t want the lira to strengthen beyond 2.0 to the basket, Ozsarac said.

The lira fell for a third day against the basket to 2.0494. It traded stronger than 2.0 between Aug. 2 and Aug. 10 and has traded weaker than that level since.

To contact the reporter on this story: Mark Bentley in Istanbul at mbentley3@bloomberg.net

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

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