ISTANBUL: The Turkish lira recovered and bond yields steadied on Monday as the central bank continued to tighten liquidity, a reflection of a new bout of concern over the currency ahead of the bank's monthly policy announcement on Tuesday.
The bank last week returned to its "exceptional days" days policy of intermitently providing cash to banks at higher rates than its main 5.75 percent policy rate through intraday auctions. It did so again with a 3 billion lira auction on Monday.
The turnaround on a policy drift which had steadily been easing conditions was prompted by a 3.5 percent decline in the lira against the dollar after the bank cut its higher overnight lending rate a month ago. Most analysts expect it to keep all its rates on hold at a meeting on Tuesday.
By 0747 GMT on Monday, the lira was trading at 1.7986 versus the dollar, compared with 1.8006 late on Friday.
"The central bank will continue tightening liquidity ahead of (the) meeting, making lira longs quite appealing. We think the central bank will target levels around 2.055 versus the basket or 1.77 versus the dollar," wrote BNP Paribas analysts.
The lira firmed against its euro-dollar basket to 2.0898 from 2.0952 on Friday, after piercing 2.10 last week, a level seen as potential to trigger central bank action.
"This likely means that the central bank will not be able to send a dovish message during (the) meeting and might not go beyond changing parameters of reserve requirement ratios," the BNP Paribas analysts noted.
The central bank has been maintaining 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.
The goal has been to defend the lira while also keeping inflation and a huge current account deficit in check and supporting the economy as growth starts to slow.
The renewed weakness of the lira has left the bank has been torn between the need to defend the lira by keeping market funding tight, and supporting the economy with stimulus as growth starts to slow.
The outcome of the bank's monthly policy meeting will be released at 1100 GMT on Tuesday. All 12 analysts polled by Reuters last week saw the bank holding its policy rate - the one-week repo - at a record low of 5.75 percent while most said it would continue to tighten the amount of free cash through the "exceptional days" system
Some analysts forecast a rise in the percentage of lira reserve requirements ratios (RRR), which banks may hold in forex or gold. Banks may currently hold up to 40 percent of their lira RRRs in forex and up to 10 percent in gold.
Under "exceptional days", the bank usually provides one-week funding at higher rates through expensive intraday repo auctions. It may also sell foreign exchange directly to the market or via intraday forex-selling auctions to boost the lira.
Intraday repo auctions are usually more costly than fixed-rate repo auctions as they are held according to the standard auction method, where banks tell the central bank the amount they want and the interest rate they are ready to pay.
On Friday, the bank injected 3 billion lira of one-week funds in the intraday repo auction at a rate of 10.90 percent, way above the 5.75 percent fixed rate offered at its usual repo auctions.
Turkey's two-year benchmark bond yield stood at 9.66 percent, virtually unchanged from a previous close at 9.67 percent.
Bond yields usually jump under tight liquidity conditions as banks sell some of their bond holdings to meet liquidity needs.
Istanbul's main stock index was 0.33 percent down at 61,216 points, slightly outperforming a 0.48 percent decline in the MSCI emerging markets index.
Shares in Turkish lender Akbank were 4.41 percent down on Monday at 6.92 lira after Citigroup said it planned to reduce its stake in the bank to below 10 percent from 20 percent.
Shares in major Akbank shareholder Sabanci Holding dropped 1.85 percent to 7.46 lira.
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