The lira weakens the most in more than a week and yields sank for a third day after Turkey’s central bank unexpectedly cut its highest lending rates by one percentage point.
The lira depreciated 0.4 percent to 1.7491 per dollar at 5:57 p.m. in Istanbul, heading for the biggest drop since Feb. 10. Yields on two-year benchmark bonds slipped to the lowest since Oct. 19, down 14 basis points, or 0.14 percentage point, to 9 percent, according to the Turk Ekonomi Bankasi AS index.
The central bank cut the maximum interest rate at which it lends to banks overnight to 11.5 percent from 12.5 percent, saying it was taking into account monetary easing in other economies. The bank in Ankara also reduced the 12 percent repo rate for market making to 11 percent, while leaving the lower limit of its so-called rates corridor unchanged at 5.75 percent, according to an e-mailed statement today after a meeting of the Monetary Policy Committee.
“The unexpected cut weighs on the lira as the market interprets it as a sign of relaxation of the monetary policy,” Murat Toprak, chief currency strategist for Europe, the Middle East and Africa at HSBC Holdings Plc in London, said in e-mailed comments.
Governor Erdem Basci introduced the corridor in October, allowing him to vary rates on a daily basis. Since mid-January he has made more funding available at the lowest end of this band even as inflation surged to a three-year high. The cheaper money supports the government in keeping the economy growing amid a slowdown in Europe, Turkey’s main export destination.
“The central bank’s current strategy, even with a 100 basis point narrower corridor, still gives it significant room to maneuver and the bank is likely to keep this flexibility until inflation slows and the credibility gap narrows,” Tevfik Aksoy, the London-based chief economist for Central and Eastern Europe, the Middle East and Africa at Morgan Stanley & Co., said.
The lira sank 18 percent last year in the worst performance worldwide and hit a record low of 1.9224 per dollar on Dec. 28 and yields soared 390 basis points in the biggest rise in three years as investors reduced positions in Turkey on account of its large current-account deficit.