Turkish bonds gain as rates unchanged

ISTANBUL: Turkish bonds strengthened on Wednesday after the central bank kept its policy rate unchanged and didn't announce any change in banks' required reserve ratios, with a parliamentary election due on June 12.

The benchmark Feb. 20, 2013 bond yield fell as low as to 8.88 percent from 8.96 percent before the decision. It closed at 8.90 percent.

After choppy trading the Istanbul share index closed down 1.47 percent at 63,609 points, underperforming a 0.6 percent decline in the MSCI emerging markets index.

The central bank said its policy mix, which relies on lower interest rates to deter inflows of hot money alongside increases to banks' required reserve ratios (RRRs) to ensure an overall tightening effect, had started to make an impact, but this had been delayed by global economic uncertainties.

"A tightening effect began to be observed on loan growth and domestic demand from the second quarter," the bank said.

The lira was weaker at 1.6050 to the dollar from 1.6036 before the decision.

"In our opinion, the announcement is positive for Turkish bonds and stocks. However, as the announcement is more dovish compared to the previous one, the effect on the lira is not clear yet," said Ibrahim Aksoy, an economist at Seker Securities in Istanbul.

"The direction of the lira will be determined by the struggle between the foreign inflows to the stock/bond market and the decreased attractiveness of the lira as a high yielding currency."

Most analysts had expected RRRs to be hiked given the persistently high credit growth. RRRS had been increased five times since November.

Data released on Monday showed credit growth as of May 13 still stood at an annual 36 percent, way in excess of the 25 percent limit the central bank says is financially sustainable.

The average forecast in a Reuters poll was for RRR hikes of some 100-200 basis points. All 17 analysts forecast the bank would keep its policy interest rate at 6.25 pct.

However analysts fear that the strategy adopted by the central banks in December leaves Turkey behind the curve in fighting inflation, particularly as first-quarter growth could reach 9 percent and higher commodity prices weigh.

The bank recently raised its year-end inflation forecast to 6.9 percent from a previous 5.9 percent after higher oil and commodity prices.

Copyright Reuters, 2011