ISTANBUL: The Turkish lira firmed slightly and bond yields edged down due to global trends on Tuesday, giving the central bank leeway to provide cheap liquidity, while investors awaited the outcome of the bank's monthly policy meeting later in the day.
The central bank's monetary policy committee is expected to announce its decision on interest rates and liquidity-management tools at 1100 GMT. A Reuters poll showed all 13 analysts surveyed expected the bank to leave interest rates unchanged.
By 0748 GMT, the lira traded at 1.8330 versus the dollar , a touch firmer than 1.8370 late on Monday. Against a euro-dollar basket it stood at 2.0683, firming from 2.0703.
"Neither the lira's strengthening nor the decline of bond yields are related to local factors... The global sentiment has recovered on prospects of a rate cut in China, which also supports Turkish assets," said Isik Okte, strategist at Halk Invest. The yield on Turkey's benchmark bond maturing on March 5, 2014, inched down at 9.40 percent, from a previous close at 9.45 percent.
After a week of sharp liquidity tightening to stop lira weakening, the central bank began on Monday to provide cheap liquidity at a fixed rate of 5.75 percent.
Some traders said the benchmark yield could decline further if the bank doesn't announce a sharp liquidity tightening.
Tight liquidity and high funding costs usually push commercial banks to sell bonds in order to meet cash needs.
While the central bank is expected to keep its rates on hold, comments by Governor Erdem Basci last week raised expectations that the bank will raise the upper limit for the proportion of lira reserves that banks may hold in foreign currencies. Currently, the limit stands at 40 percent.
Analysts saw such a move boosting official forex reserves without greatly harming the lira.
"We expect the central bank to leave the interest rate corridor unchanged, however, Governor Basci mentioned last week that the council could consider increasing the amount of lira reserve requirement that can be held in forex," wrote analysts at BNP Parisbas.
"Nonetheless we expect the market reaction to be fairly muted and don't foresee a change in the bank's rhetoric in today's meeting," analysts added.
The central bank has maintained a complex policy mix since late 2010 based on variable daily injections of lira funding, a flexible corridor between base lending and borrowing rates and high bank reserve requirements, to keep inflation and a huge current account deficit in check.
The bank adopted a more hawkish tone at its policy meeting in March and Basci said on May 18 that the bank would prefer to keep monetary conditions tight.
The main stock index was 0.8 percent up at 55,284 points, underperforming a 1.19 percent rise in the MSCI emerging markets index.
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