The lira weakened the most in more than a week after Governor Erdem Basci said the central bank will gradually increase the proportion of lira reserves lenders keep in foreign exchange, triggering bets yields may decline.
The Turkish currency depreciated 0.8 percent to 1.8473 per dollar at 5:14 p.m. in Istanbul, the most on an intraday basis since May 22.
The central bank is introducing a new mechanism to reduce the need for intervention in the foreign exchange markets, Basci said today. It will gradually raise the amount of lira reserves banks may deposit in dollars to 60 percent from 40 percent, enabling lenders to deposit or withdraw foreign currency as per their requirements, the governor said in a speech in Ankara. A higher proportion of reserve in dollars means more local currency in the hands of banks, implying lower yields and a weaker lira.
“The central bank is telling banks to give their foreign-exchange to the bank in return for the lira liquidity,” Ugur Kucuk, a fixed-income strategist at Is Securities, Turkey’s biggest brokerage, in Istanbul said in e-mailed comments. “There is nothing positive for the lira in this step and the lira may even weaken if interest rates decline as a result of these steps but higher bank reserves may support the market confidence.”
Turkey’s banks hold 225.5 billion liras ($122.4 billion) of the government lira bonds, which account for 56.2 percent of the total government debt as of April, according to the Treasury website. While the move up to 60 percent will come over time, the central bank increased the local currency reserves in dollars to 45 percent yesterday, freeing up about 2.8 billion liras.
The total foreign-exchange reserve in Turkey has fallen from $85.9 billion in October -- when Basci introduced a flexible interest rates policy -- to $80 billion on May 18. Part of the reduction is down to the central bank selling dollars last year to boost the lira, which fell 18 percent in 2011.
The Ankara-based bank lent 3 billion liras of funding to banks at 5.75 percent today, the third day of loosening after withholding funding at the lowest policy rate in the previous five working days. It varies the policy rate daily between 5.75 percent and 11.5 percent within the so-called interest rate corridor to defend the current and curtail inflation.
Yields on two-year debt climbed for the time in three days, up six basis points, or 0.06 percentage point, to 9.46 percent today. Bond prices have risen since the beginning of the year, with yields at 11.5 percent on Jan. 4. Yields fell to 9 percent, the lowest level since October, on Feb. 21.