Lira Rises as Turkey Bonds Extend Gains After Interest-Rate Cut

  • Central bank cuts overnight-lending rate by 25 basis points
  • Yield on nation’s ten-year lira bonds falls to July 15 low

Where Next for EM Currencies and the Lira?

Turkey’s currency rose and its bonds, among the highest-yielding in emerging markets, extended their advance after the central bank cut a key interest rate for a seventh straight month amid demand for risky assets.

The lira climbed 0.5 percent as of 5:09 p.m. in Istanbul and the yield on 10-year government lira bonds fell 31 basis points, the most among 27 emerging markets tracked by Bloomberg. The bank lowered the overnight-lending rate 25 basis points to 8.25 percent, matching analyst expectations.

Decisions by the Federal Reserve to keep U.S. interest rates unchanged and the Bank of Japan to maintain its stimulus policy bolstered appetite for high-yielding assets, giving Turkish policy makers room to continue an easing cycle that started in March. The nation relies on foreign inflows to fund its current-account deficit, one of the widest among G-20 countries.

“The tone of the statement is dovish, so they are likely to continue easing,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail. “Given the supportive global backdrop after BOJ and Fed meetings, the market is likely to price-in further cuts,” so short-term yields will probably decline towards the one-week repo rate, he said.

The central bank kept its one-week repurchase and overnight-borrowing rates unchanged at 7.5 percent and 7.25 percent. Third quarter economic activity showed a “deceleration,” the central bank said in a statement on its website. As consumer demand slows, core inflation is decelerating, with the rate dropping to 8.41 percent in August from this year’s high of 9.7 percent in February.

The yield on ten-year debt dropped to 9.44 percent, the lowest level in two months, and the lira strengthened to 2.9406 per dollar.

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