Turkish bond yields dipped further on Friday after the central bank's surprise decision on Thursday to raise banks' required reserve ratios (RRR), pushing back expectations for interest rate hikes. The lira closed slightly stronger at 1.5150 compared with 1.5158 on Thursday, when new central bank governor Erdem Basci chaired his first monetary policy committee meeting.
The bank held its policy rate, the one-week repo, at 6.25 percent but lifted the reserve ratio on one-month lira deposits to 16 from 15 percent, and raised the ratio on foreign currency deposits of one year duration to 12 from 11 percent. The increases would drain $1.4 billion and 1.5 billion lira from the market, the bank said.
"It looks like foreign investors expectations of interest rate hikes have been postponed to the year end," said one bond trader. The yield on the benchmark February 20, 2013 bond closed at 8.26 percent, down from 8.45 percent on Thursday, in the wake of the central bank moves.
Bonds, the main asset foreign investors buy with the lira, have been weakening on expectations that the bank would eventually have to raise interest rates. New central bank governor Basci, a 44-year-old former deputy governor, is considered the architect of an unorthodox policy begun last December, which combines lower interest rates with higher required reserve rates for banks.
The central bank's strategy has been aimed at tightening monetary policy overall while preventing further appreciation of the lira as ultra-low US interest rates spur capital inflows to emerging markets including Turkey. Istanbul's share index rose 0.18 percent to 68,691 points, outperforming a flat MSCI emerging markets index. Shares in leading mobile phone company Turkcell were suspended all day after disagreements at its annual general meeting on Thursday. A bid by TeliaSonera, which has a 37 percent stake in Turkcell, to remove the chairman of its board was unsuccessful.
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