ISTANBUL: Turkish assets gained on Monday after March consumer inflation turned out lower than expected and fell to a record annual low of 3.99 percent, reducing the case for a swift increase in interest rates.
The yield on the Nov 7, 2012 benchmark bond fell to 8.89 percent from 9.01 percent prior to the release of the data.
The yield had strengthened last week after stronger than expected fourth-quarter economic growth data raised doubts over whether the central bank's monetary policy was aggressive enough to counter risks of overheating.
March inflation data showing consumer prices rose 0.42 percent on the month, below a forecast rise of 0.66 percent, wins the bank more time however, and helps boost its credibility amid doubts over its unorthodox tightening methods.
"Inflation was a huge surprise, so now people are pricing in a different situation. It appears we will have a low interest rate and low inflation scenario which means no rate hikes in the coming months. Some in the market had expected hikes could come as early as this month," said a bonds dealer.
"It is highly unlikely there will be a rate hike before the election in June. The bond yield may stray slightly over 9 percent but as long as markets continue to trust the central bank it will stay at these levels," he added.
The lira traded as strongly as 1.53 against the dollar, its strongest level in two months. At 1136 GMT it stood at 1.5360, compared with a close on Friday of 1.5380.
The currency has strengthened in recent weeks in anticipation of a rate hike, but traders said more trust in the central bank's policy of holding rates and raising banks' required reserve ratios (RRRs), is also supportive of the lira, which is seeing renewed carry trade.
The bond yield stood at 7.08 percent at the start of 2011 but has risen to levels above 9.0 percent. With the central bank's policy rate at 6.25 percent this has made carry attractive.
The main Istanbul share index rose 1.78 percent to 66,887 points, outperforming the emerging benchmark which rose 0.57 percent.
The index was led higher by banking shares, which rallied 2.82 percent.
Moody's said in a note increases to banks' required reserve ratios were "credit positive" as they encouraged more sustainable credit growth and a longer maturity profile.
Concerns about the central bank falling behind the curve in fighting inflation and lower profit expectations for Turkey's banks due to the higher RRRs have seen Turkish stocks, star performers of 2009 and 2010, lose 2 percent of their value since the start of the year, underperforming other emerging indexes.
Economy Minister Ali Babacan said after the release of Monday's data that inflation was likely to remain volatile throughout the year and end the year somewhat above the official target.
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