Turkish Lira Swings as Central Bank Keeps Rates Unchanged

  • Policy makers keep all three interest rates unchanged
  • Treasury sells two, six and 10-year debt in auctions

Turkey’s lira swung between gains and losses as the central bank kept its three main interest rates unchanged and the government’s bond sale attracted the highest bids since October.

The currency advanced as much as of 0.2 percent and retreated as much as 0.3 percent before trading less than 0.1 weaker at 2.9357 per dollar as of 6:54 p.m. in Istanbul. The yield on five- and 10-year government bonds fell, while the yield on two-year debt rose. The central bank held the one-week repurchase rate at 7.50 percent, the overnight lending rate at 10.75 percent and the overnight borrowing rate at 7.25 percent, in line with all the analyst estimates compiled by Bloomberg.

The lira has weakened 0.7 percent this year partly as investors look for clarity from a central bank that has been pressured by the AK Party government, from which President Recep Tayyip Erdogan hails, to lower borrowing costs in an effort to spur growth in the $800 billion economy even as inflation accelerates. That’s been compounded by speculation over who will succeed Governor Erdem Basci when his term ends in April and increased terrorist attacks at home as the conflict in neighboring Syria worsens.

“In this environment, an actual tightening is required,” said Ozgur Altug, the chief economist at BGC Partners in Istanbul. ”However, globally there are alleviating factors, such as low level of commodity prices, negative interest-rate mania in some countries and expectations that the Federal Reserve won’t able to hike throughout 2016, which give the central bank more time to observe the trend in inflation. We continue to expect the Bank to remain on hold at least until the appointment of the next governor.”

Inflation Target

Inflation accelerated to 9.58 percent last month, the highest since May 2014. The central bank in 2015 missed its inflation target for a fifth year, which has been at 5 percent since 2012. The yield on the nation’s five-year and ten-year notes fell two basis points to 10.87 percent and 10.73 percent respectively. The rate on two-year government notes rose three basis points to 11.15 percent.

By leaving the rates unchanged, “the central bank is playing a dangerous game with inflation and there is a real risk that at some point this year rates will have to be hiked quickly in response to the lira weakness,” analysts at Toronto Dominion Bank including Cristian Maggio in London said in an e-mailed report before the decision.

Debt Sale

The Ankara-based Treasury’s 10-year debt sale had a bid-to-cover ratio of 2.5, up from 1.7, as the average yield jumped to 10.76 percent. It also auctioned two- and six-year bonds.

Still, “I was expecting a higher demand on improvement in global liquidity conditions,” said Istanbul-based Erkin Isik, a strategist at Turk Ekonomi Bankasi AS. The “inflation outlook and approaching management change in the Turkish central bank will likely to lead Turkish bonds to underperform its peers,” he said.

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