Lira Rises as Basci Cuts One Turkey Rate, Keeps Another Fixed

The lira appreciated after the Turkish central bank unexpectedly left the overnight borrowing interest rate unchanged while lowering the benchmark repurchase rate to spur economic growth.

The lira strengthened 0.2 percent against the dollar at 1.7812 at 4:59 p.m. in Istanbul, the biggest gain since Dec. 14. The currency has appreciated 6.2 percent this year, the third biggest advance among 10 emerging markets in Europe, the Middle East and Africa. Yields on two-year benchmark debt increased seven basis points, or 0.07 percentage point, to 5.81 percent, the highest since Dec. 5.

The central bank, led by Governor Erdem Basci, kept the bottom of its so-called rates corridor unchanged at 5 percent. The median estimate of seven economists surveyed by Bloomberg was for a 25 basis-point cut. Basci maintained the overnight lending rate at 9 percent and lowered the one-week repurchase rate by 25 basis points to 5.5 percent, in line with estimates.

“Market players including us were expecting that the bank would cut the lower end of the corridor by 25-50 basis points,” Ozgur Altug, chief economist at BGC Partners in Istanbul, said in an e-mailed note. “Since the bank did not touch its lower end, the lira appreciated.”

Unemployment in Turkey climbed to 9.1 percent in September, the Ankara-based statistics office said yesterday. Gross domestic product advanced 1.6 percent on an annual basis in the third quarter, the slowest pace since the 2009 recession, the agency said last month. Turkey’s economic growth may slow to 3 percent this year from 8.5 percent in 2011, according to the median estimate of 24 analysts on Bloomberg.

Economic Outlook

Basci implemented a rate corridor in October of last year that allows him to adjust interest rates on a daily basis. It was created to balance above-target inflation, slowing economic growth and high volatility of the lira.

Given the country’s economic outlook, the central bank’s decision today “is less dovish than what the markets expected,” Luis Costa, an emerging market strategist at Citigroup in London, said in an e-mailed note.

The central bank has driven the average cost of funding for banks down by more than a half this year to 5.59 percent on Dec. 17, helping the benchmark bond yields fall 520 basis points in the biggest rally globally.

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

To contact the editor responsible for this story: Alaa Shahine at asalha@bloomberg.net

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