Turkish Lira’s Real Exchange Rate Stays Below Bank Threshold

The Turkish lira’s value as measured by the central bank’s real effective exchange rate index fell last month, signaling there’s no need for action by the bank to weaken the currency.

The index, which measures the lira’s purchasing power against the currencies of Turkey’s main trading partners, declined to 118.3 in December from 119.4, the central bank in Ankara said on its website today.

The bank is monitoring the index, and a reading above 120 would signal an overvalued lira and may trigger a policy response, Governor Erdem Basci said in November. Basci last month cut the benchmark rate for the first time in 16 months to spur growth and halt gains in the lira that boost imports and swell the current-account deficit.

The exchange-rate figures, together with an increase in the core inflation rate announced yesterday, “support the view that the central bank is unlikely to cut the policy rate,” Inan Demir, chief economist at Istanbul-based lender Finansbank AS, said in response to emailed questions.

The lira gained 6 percent against the dollar last year. It hit a six-month high in November after Fitch Ratings awarded Turkey its first investment-grade credit score since 1994. Lira volatility fell close to 6 percent in December, the lowest since the currency was allowed to float in 2001.

Yields on two-year benchmark lira bonds rose nine basis points to 6.37 percent at 4:40 p.m. in Istanbul. The Turkish currency traded at 2.0573 against a euro/dollar basket, monitored by many investors.

“The central bank will spare its bullets” unless the rate falls below 2.03, said Emre Tekmen, an economist at Turk Ekonomi Bankasi AS in Istanbul.

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