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liraISTANBUL: The Turkish lira eased to a new three-month low against a euro-dollar basket ahead of a central bank policy meeting on Tuesday as some investors anticipated the bank might narrow its interest rate corridor more than expected.


Istanbul's main share index dipped 0.4 percent, virtually in line with the emerging markets index.


The lira eased to 1.8036 against the dollar, from 1.7955 late on Monday.


Against its euro-dollar basket, it hit its weakest level since June 5 at 2.0843 in early trade. By 0803 GMT, it stood at 2.0805, weakening from 2.0772 late on Monday.


"Some investors are pricing in the central bank being more dovish than expected at today's meeting. Hence the lira is weakening," said Burcin Metin, head of the forex desk at ING Bank.


The central bank is due to release a post-meeting statement at 1100 GMT.


Since late 2010 the central bank has used the gap between its overnight borrowing and lending rates, known as the interest rate corridor, as a flexible policy tool to manage lira liquidity on a daily basis. It has also maintained a low policy rate and high reserve requirement ratios to fight inflation and narrow a gaping current account deficit.


The bank's overnight lending rate stands at 11.5 percent currently and the overnight borrowing rate stands at 5 percent, with the policy rate at a record low 5.75 percent.


A Reuters' poll forecast the central bank will cut its overnight lending rate, or the upper end of its interest rate corridor, for the first time since February. They forecast a 100 basis point cut to 10.5 percent, now that inflation and economic growth are easing.


"The rise in commodity prices also affect the lira negatively due to the risks it creates over Turkey's inflation and current account deficit," Metin said.


The oil price remains elevated at close to $114 a barrel despite volatility in the past few days. As Turkey imports some 95 percent of its energy needs, a rise in energy prices risks aggravating the country's high current account deficit which rose to 10 percent of its national output last year.


The yield on Turkey's two-year benchmark bond stood at 7.32 percent, virtually unchanged from a previous close at 7.33 percent, as investors were awaiting the central bank policy decision.


Earlier last week, the two-year bond yield hit 7.15 percent, its lowest level since January 2011 on low funding costs for banks and hopes of aggressive rate cuts from the central bank.


Istanbul's main share index was down 0.35 percent at 67,855 points, in line with a 0.52 percent decline in the MSCI emerging markets index.


Copyright Reuters, 2012

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