Turkish bond yields fell to the lowest level in more than eight months after the central bank signaled it was more comfortable about inflation and boosted lira liquidity by allowing banks to keep more reserves in dollars and gold.
The yield on benchmark two-year government debt declined 7 basis points, 0.07 percentage point, to 8.94 percent at the close in Istanbul, the least since October. Yields on the 10-year slid five basis points to 8.72 percent, the lowest since January last year, according to a Turk Ekonomi Bankasi AS index. The lira weakened 0.4 percent to 1.8003 per dollar, depreciating for the first time in eight days.
Turkey’s central bank replaced a reference of having a “tight” stance against inflation with the word “cautious” when publishing a decision to leave the benchmark rate of 5.75 percent unchanged today, matching the estimate of all 11 economists in a Bloomberg survey. It also stated that global uncertainties and demand will support a slowdown in price rises.
“In terms of inflation and overall monetary policy we feel that the bank is more comfortable nowadays because petroleum prices continue to decline, the lira is relatively stable and annual consumer price inflation came down,” Ozgur Altug, chief economist at BGC Partners in Istanbul, said in an e-mailed report to clients today.
The central bank also increased the proportion of lira reserves banks may hold in foreign currency to 50 percent from 45 percent and the proportion of gold reserves to 25 percent from 20 percent. The measure will provide as much as 5.6 billion liras ($3.1 billion) of lira liquidity to the market, the central bank said in an e-mailed statement accompanying today’s rates decision.
Basci is easing policy by lending more often at his benchmark 5.75 percent rate after inflation slowed to 8.3 percent in May from 11.1 percent in April, the highest in more than three years. The country’s current-account deficit retreated in April for a sixth consecutive month.
The central bank lent 2 billion liras to banks today at 5.75 percent. It has provided liquidity at the minimum funding rate for a 13th consecutive day, the longest period since March. The bank lent 3 billion liras at the same rate yesterday.
The 5.75 percent rate forms the bottom end of an interest rate corridor Governor Erdem Basci set up in October to support the lira and control inflation. The upper end of the corridor is 11.5 percent.
The central bank varies its daily funding rate between these two levels, depending on Basci’s view of whether the currency and economic developments need a tight or loose policy.