Lira Falls as Turkey Bulls Puzzled by Decision to Hold Rates

  • 10-year bonds drop as yield climbs to more than two-month high
  • Surprise could further erode `credibility,' JPMorgan says

The lira fell the most in emerging markets and Turkish bonds declined after the central bank unexpectedly left interest rates unchanged, puzzling investors who anticipated a move to simplify monetary policy.

The currency weakened 0.8 percent to 2.9386 per dollar at 5:25 p.m. in Istanbul. The Borsa Istanbul 100 Index dropped 1.2 percent and the 10-year government yield rose the most in six weeks. A survey of 22 economists predicted a 50 basis-point increase in the one-week repurchase rate to 8 percent.

Central bank Governor Erdem Basci pledged in August to simplify the country’s interest-rate corridor around its one-week repo rate “with the start of the normalization of global monetary policies.” Investors expected that would happen Tuesday after the Federal Reserve raised borrowing costs for the first time in a almost a decade.

“Where is the policy normalization that the central bank spoke about after the Fed moves?” Tim Ash, a credit strategist at Nomura Plc in London, said in an e-mailed note. “Big questions will be raised again about the central bank’s independence. Even Turkey bulls like myself are struggling to understand this one.”

The Monetary Policy Committee also kept the overnight lending and borrowing rates at 10.75 percent and 7.25 percent, respectively. The central bank will meet with economists on Wednesday to discuss its decision.

The lira has been among the five worst performing currencies in emerging markets this year, sinking 21 percent against the dollar after the country went to polls two times in six months to break a political stalemate and the war in neighboring Syria heightened security risks.

Short-Term Drop

“The decision may have a very short-term negative impact on the lira and lira assets given market expectations for the simplification to start,” said Ibrahim Aksoy, a strategist at HSBC Asset Management in Istanbul, who was one of six in a Bloomberg survey to correctly predict the central bank would leave the repo rate unchanged.

“Unless the general perception toward emerging markets deteriorates, we do not see this initial reaction persisting,” Aksoy said.

Turkiye Garanti Bankasi AS and Akbank TAS were the biggest contributors to a decline in the Borsa Istanbul 100 Index, falling 2 percent and 1.6 percent, respectively. The yield on the government’s 10-year debt jumped 25 basis points to 10.82 percent.

Credibility Issue

The central bank’s lack of action today threatens to further erode its credibility, according to JPMorgan Chase & Co’s Istanbul-based economist Yarkin Cebeci. Investors have dumped Turkish assets in part on concern the government was encroaching on the central bank’s independence by demanding rate cuts to spur growth even as inflation exceeded its targets.

“The central bank will need to work harder and make fewer mistakes to regain credibility in the coming months,” Cebeci said in an e-mailed note.

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