Lira Gains to 2-Week High as Central Bank Signals Rate Increase

The lira headed for its highest level in almost two weeks as the Turkish central bank said it may raise interest rates this month to bolster the currency that sank to a record low last week.

The lira appreciated as much as 1.2 percent against the dollar and traded up 0.9 percent to 1.9376 by 4:53 p.m. in Istanbul, set for its highest level since July 2. Yields on two-year benchmark notes fell 18 basis points, or 0.18 percentage point, to 8.95 percent, after dropping 46 basis points yesterday.

“A measured step to widen the interest-rate corridor will be on the agenda of the next Monetary Policy Committee meeting on July 23,” Governor Erdem Basci said in a statement on the central bank’s website today. Turkey’s central bank has sold $6.35 billion in currency auctions since June 11 to support the lira, which depreciated to 1.9740 per dollar on July 8. The exchange rate will weaken 3.3 percent to 2.0065 per dollar in December, currency futures show.

“This is a strong signal that they are ready to take out the bazooka,” Benoit Anne, head of emerging-market strategy at Societe Generale SA in London, said in e-mailed comments today.

Foreign investors reduced the lira debt they owned to $61.5 billion in the week ended June 28 from $71.8 billion on May 3. Turkey’s 10-year yields have jumped since Federal Reserve Chairman Ben S. Bernanke signaled May 22 the U.S. central bank may scale back its $85 billion a month of bond purchases that helped fuel a rally in higher-yielding debt.

“In this environment, it would have to be sizable,” Anne said referring to a rate increase in Turkey.

Budget Deficit

The lira has weakened 7.9 percent this year in the biggest depreciation among emerging markets in Europe, the Middle East and Africa after the South African rand, according to data compiled by Bloomberg.

The central bank last raised interest rates in October 2011, when it introduced a so-called interest-rate corridor to adjust lenders’ funding costs and rein in a current-account deficit that swelled to a record $77 billion that year. It has lowered the corridor this year and cut borrowing costs to spur growth.

Turkey’s budget deficit narrowed 81 percent to 1.2 billion liras ($618.6 million) in June, Finance Minister Mehmet Simsek said at a news conference in Ankara today. The country has room to maneuver and will meet its 2013 targets comfortably, he added.

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