Turkish lira firms, new support seen at MPC meeting

ISTANBUL: The Turkish lira firmed against the dollar on Wednesday after the central bank said it would hold an interim monetary policy committee meeting on Thursday, fuelling expectations it will announce fresh measures to support the currency.

July inflation, which was lower than forecast, also helped to pull bond yields down, while shares were lower, reflecting weakness in markets globally.

The lira strengthened to 1.7095 against the dollar after the announcement of the central bank meeting from 1.7220 beforehand. It closed at 1.7050 on Tuesday.

The lira closed at 1.6980 against the dollar in the interbank market on Wednesday.

The yield on the benchmark May 15, 2013 benchmark bond closed at 8.65 percent from 8.77 percent on Tuesday.

The central bank, battling a ballooning current account deficit and weakening lira, said it would hold an interim policy meeting to assess concerns over the euro zone's debt problems and global growth.

The lira has been under pressure in recent weeks because of a high current account deficit and doubts about the central bank's dovish stance on interest rates that analysts fear have rendered the economy vulnerable to external shocks.

At the end of last month Governor Erdem Basci said that the bank had the tools to stop the currency weakening further, and was monitoring the inflationary impact of the depreciation.

The central bank has said it may gradually narrow the interest rate corridor if global growth worries continue to hurt risk appetite. The corridor is the difference between its borrowing and lending rates.

"We expect the overnight borrowing rate to be hiked tomorrow, perhaps by as much as 400 bps which would reverse the steep cut in this instrument delivered in November last year. This would offer a higher and less volatile carry and as such we would expect it to be TRY-positive," said Inan Demir, an economist at Finansbank in Istanbul.

"We do not have a high conviction on the policy rate decision, but based on Governor (Erdem) Basci's guidance we would not rule out a modest cut in the policy rate either."

INFLATION BOOSTS BONDS

Turkish consumer price inflation in July stood at 6.31 percent year-on-year while producer prices rose 10.34 percent.

The data was released shortly after the central bank announcement about its meeting on Thursday.

"Generally July inflation data is in line with the central bank monetary policy practice, so this will not cause any change in monetary policy. I think the reason the bank wanted to hold the MPC meeting tomorrow was to see the inflation data, but the data is not the kind to have an impact on the central bank decisions. The data is positive for bonds," said Fatih Keresteci, a strategist at HSBC Bank in Istanbul.

Late last year the central bank introduced an unorthodox new policy aimed at tackling Turkey's surging current account deficit based on lower interest rates to deter inflows of hot money and weaken the lira, as well as higher required reserve ratios for banks to curb loan growth.

The main Istanbul share index dropped 0.72 percent to 61,315.08 points, outperforming the emerging markets benchmark index which fell 2.1 percent.

Garanti Bank posted a 2.5 percent increase in the second quarter, making it the most traded stock on the Istanbul bourse and shares gained 1.62 percent.

Yapi Kredi Bank posted a 19.8 percent decline in second-quarter net profit because of flat net interest income and trading losses, and shares closed 1.2 percent higher.

Among other lenders posting second-quarter earnings today, Denizbank , owned by Franco-Belgian financial services group Dexia , posted a 36.5 percent increase in second-quarter earnings.

There was little market reaction to a statement from ratings agency Moody's which said Turkey's rating could be upgraded if Turkey's fiscal fundamentals improve further.

Copyright Reuters, 2011