ISTANBUL: Turkey's lira firmed on Monday on the view that the central bank, which may cut interest rates on Tuesday despite rising oil prices, will nevertheless keep liquidity tight to support the currency.
Turkey's central bank was expected to cut the one-week repo rate by 50 basis points at a meeting on Tuesday, despite fighting in Iraq driving up oil prices, which pushes up inflation in energy importer Turkey.
The bank has been under pressure from the prime minister to cut rates since January, when an emerging market sell-off pushed the lira to record lows and forced the bank to sharply hike all key rates.
Analysts said that policy may remain tight even with a rate hike, however, as the bank could use policies such as restricting the amount of liquidity available at one-week repo auctions to buoy interbank rates.
"What CBRT (Turkish central bank) will do tomorrow is unlikely to change the recent trend emanating from external conditions," a note from TEB-BNP Paribas said.
"In any case, CBRT will have flexibility to tighten liquidity conditions and lead interbank rates higher, in case of an escalation in capital outflows and depreciation pressure on currency."
Turkish assets shrugged off the fighting in neighbouring Iraq, as US Secretary of State John Kerry landed in Baghdad to press Prime Minister Nuri al-Maliki to form a more inclusive government to put an end to a Sunni insurgency that has swept over much of northern and western Iraq.
The main Istanbul share index was up 0.4 percent at 78,715 by 0806 GMT, outperforming the broader MSCI index of emerging markets, which fell 0.15 percent.
The lira firmed to 2.1409 against the dollar from 2.1470 late on Friday.
The yield on the 10-year benchmark government bond fell slightly to 8.91 percent compared with 8.99 percent at Friday's close. The Islamist insurgency in Iraq has pushed oil prices near nine-month highs while dozens of Turkish citizens remain kidnapped by Sunni militants.
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