Lira Pares Gain as Rate Cut Exposes Turkey Assets to Brexit Risk

Turkey’s lira erased gains after a decision to cut a key interest rate for a fourth straight month left it more exposed to the risks surrounding the U.K.’s referendum.

The currency, which rose as much as 0.4 percent earlier in the day, traded little changed at 2.9069 per dollar as of 5:41 p.m. in Istanbul. The Borsa Istanbul 100 Index erased gains of as much as 0.7 percent after Turkey’s central bank lowered its overnight-lending rate by 50 basis points to 9 percent, matching the median estimate of 22 analysts. It left its other two main rates unchanged.

The fourth-straight cut to borrowing costs, the longest easing streak since 2013, has reduced the central bank’s three-tiered rates corridor to the narrowest since it was introduced six years ago. While that delivers on a pledge to simplify monetary policy, it also diminishes the yield on Turkish assets at a time when risk appetite is waning, as anxiety over the referendum in the U.K. this week grows.

The rate cut “could prove a risky decision as it leaves the lira more exposed to a major risk event -- the U.K. referendum -- later this week,” Piotr Matys, a strategist at Rabobank in London, said by e-mail.

The central bank left its one-week repurchase rate and overnight-borrowing rate unchanged at 7.5 percent and 7.25 percent, respectively. Government officials, including President Recep Tayyip Erdogan, have called for lower borrowing costs to help boost economic growth even as inflation which slowed to a 2013-low this year was more than 150 basis points above the central bank’s target.

The yield on the nation’s two-year government bonds fell one basis point to 9.06 percent, while the yield on Turkey’s 10-year notes climbed eight basis points to 9.62 percent.

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