Turkish Stocks Climb Most in World as Rate Corridor Narrows

  • Interest-rate swaps signal more declines in lending rate
  • Lira pares decline, 10-year yield rises above two-year rate

Turkish stocks rose for the first time in three days and the lira pared its retreat following the central bank’s surprise decision to start narrowing its interest-rate corridor by cutting the overnight-lending rate. A key indicator signaled further reductions in the coming months.

The Borsa Istanbul 100 Index rose 1.2 percent, the most worldwide, and the currency was little changed after falling 0.5 percent. Policy makers lowered the rate at the upper end of a three-pronged corridor by 25 basis points to 10.50 percent, while keeping the other measures unchanged. Only three out of 19 analysts surveyed by Bloomberg predicted a cut.

The reduction marked the first step in meeting an earlier pledge to abandon the corridor in favor of a single-rate policy, the central bank said. The cut, the first since February 2015, comes after the European Central Bank announced a stimulus package and the Federal Reserve signaled a slower pace of interest-rate increases, giving Turkey room to loosen its monetary policy, according to HSBC Asset Management’s Ibrahim Aksoy, an Istanbul-based investment strategist.

“The central bank indicated that the bias is gradually shifting in favor of monetary policy easing over the mid-term horizon,” said Piotr Matys, an emerging-markets foreign-currency strategist at Rabobank in London who estimated a 50 basis-point cut. “It is a fairly symbolic cut that allowed the central bank of Turkey to test if the market is indeed ready for a potential shift in the monetary policy bias to easing.”

The lira slipped less than 0.1 percent to 2.8781 per dollar as of 6:22 p.m. in Istanbul. The yield on 10-year bonds rose 10 basis points to 10.23 percent, climbing above the two-year rate for the first time in two months. Lenders Turkiye Garanti Bankasi AS and Akbank TAS led equities higher, gaining at least 2.5 percent.

Swaps that gauge one-month interest-rate expectations for the overnight-lending rate two months from now declined to 10.09 percent, near the lowest level since December. That’s 41 basis points less than the upper corridor and a sign traders see more rate cuts when the new central bank governor is appointed, Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail.

The central bank kept the one-week repurchase rate at 7.50 percent and overnight borrowing rate at 7.25 percent, in line with estimates in other Bloomberg surveys of economists. Erdem Basci’s five-year run as governor is set to end next month, and a successor has yet to be named.

The rate cut shouldn’t trigger panic in the market because it doesn’t immediately translate into a decline in the average funding cost, Ipek Ozkardeskaya, a market analyst at London Capital Group, said by e-mail before the decision.

The bank controls the weighted average cost of bank funding by adjusting the amount of liquidity it lends through daily one-week repo auctions, forcing banks to borrow at higher overnight rates to cover any remaining funding needs.

The reduction is “is certainly a sign that the bank could opt for a looser monetary policy,” Ozkardeskaya said. “All eyes are on the reshuffle at the heart of the monetary policy committee in April.”

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