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Turkish Lira Climbs After Central Bank Cuts Dollar Lending Rate

The lira headed for its biggest one-day rise in forty days and performed the best among emerging markets, rebounding from the lowest in more than two years, after the central bank cut its lending rate for deposits in dollars and euros to help boost foreign exchange liquidity.

The lira gained 1.2 percent to 1.7603 per dollar at 1:53 p.m. in Istanbul. The bank in Ankara lowered the lending rate in dollars to 4.5 percent from 5.5 percent and the rate in euros to 5.5 percent from 6.5 percent, according to an e-mailed statement today.

“This is positive in the sense that it is showing the central bank’s intentions,” Baris Karaayvaz, a currency trader at Turkiye Garanti Bankasi AS in Istanbul, said in e-mailed comments. “The central bank is cutting the cost of liquidity and it does not want to permit extreme movements that may be caused by the absence of liquidity.”

The central bank has taken measures to stem a decline in the lira that may encourage higher inflation, including starting dollar-selling auctions on Aug. 5.

“Developments in the foreign exchange market will be watched closely and measures that are needed will be taken in a timely fashion,” the central bank said in a statement accompanying today’s decision.

State Fund Sales

Turkey’s state-run employment fund Iskur sold foreign currency for liras for the second day after the lira extended a two-year low against the dollar, General Manager Kemal Bicerli said in an interview. The $80 million transaction followed the sale of $85 million yesterday, Bicerli said in a telephone interview from Ankara. Iskur may sell more foreign exchange “in the coming days” depending on market opportunities, he said.

The central bank has taken measures to arrest a slide in the lira, which accelerated amid concern over the nation’s record-high current account deficit. The deficit widened to $68.2 billion, or about 9 percent of economic output, in the 12 months through May.

The lira trimmed its loss to 4.2 percent since Aug. 4, when the central bank cut its interest rates by half a percentage point to a record low of 5.75 percent at an extraordinary meeting, citing risk of an economic slowdown spreading from Europe. The bank sold $70 million in an auction today.

The central bank has lowered its benchmark repo rate by 125 basis points since November to 5.75 percent, while adding to reserve requirements for lira deposits to rein credit growth.

Royal Bank of Scotland Group Plc revised its lira forecast of 1.75-1.80 to year-end to 1.90 today against the dollar, citing the country’s large financing gap and ’’uncertainty over the policy outlook.’’

Worst Performer

The lira dropped 12.5 percent this year, the worst performer among 31 major currencies tracked by Bloomberg, on concern the fastest growing G-20 economy is overheating as low borrowing costs spur rising inflation and a record current-account deficit.

“Foreign investors currently appear to have little understanding/faith in the monetary policy mix at present, while there is evidence that the weak global backdrop is beginning to turn the domestic investor base much more negative,” Tim Ash, the London-based head of emerging-market strategy at Royal Bank of Scotland Group Plc, said in a note.

Credit default swaps insuring Turkish government debt against default over five years rose 6.88 to 247.64 today.

“Foreign exchange weakness is all the more ‘‘concerning’’ given that this is prime holiday season and foreign exchange coffers should being swollen by a record tourism season,” Ash said.

Yields on the two-year bonds climbed four basis point, or 0.04 percentage point, to 8.38 percent, a RBS local bond index showed. The ISE National 100 Index fell for an eighth day and traded 0.8 percent lower at 51,853.26, bringing its five-day decline to 16 percent.

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