Turkish Yields Drop Second Day as REER Tests Critical Level

Turkish bond yields dropped for a second day as a measure of the lira’s value approached a key level monitored by the central bank, spurring speculation of interest rate cut this month.

The real effective exchange rate index rose to 119.95 from 119.75 in February, the central bank said on its website today. The gauge, abbreviated as REER, measures the lira against an inflation-weighted basket of currencies used by Turkey’s trading partners. A “measured rate cut” may be in store if the value of the lira exceeds the central bank’s limit of 120, Central Bank Governor Erdem Basci said at a conference in the southern Turkish city of Mardin yesterday.

“We are expecting a 25 basis point cut in the policy rate of 5.5 percent in the meeting on April 16,” Gizem Oztok Altinsac, an economist at Garanti Investment, wrote in an e-mailed note today.

A reading between 120 and 130 on the REER index could prompt a “moderate” response, Basci said.

Yields on two-year domestic bonds fell 11 basis points to 6.16 percent, set for the lowest since March 21, at 5:00 p.m. close in Istanbul, after declining 16 basis points yesterday, the most in almost five months. The lira advanced 0.1 percent to 1.8056 per dollar.

“We forecast that the REER for April may be close to 121 should the lira’s nominal value continue at around today’s levels,” Ibrahim Aksoy, an economist at Seker Securities in Istanbul, wrote in an e-mailed note. “We believe that a 25 basis point policy rate cut is highly probable at the next meeting.”

Basci introduced a variable-rates policy, employing a so-called corridor of two rates in addition to the benchmark rate, in October 2011 to help control the lira by managing capital inflows and containing loan growth.

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