ISTANBUL: Turkish bond yields rose and the lira weakened on Tuesday after the central bank halted its regular auctions of foreign currency and took another step to raise banks' cost of funding and market interest rates.
The bank set a higher upper limit for the liquidity it provides through expensive one-month repo auctions and is expected to reduce the funds it provides at cheaper one-week rates correspondingly.
The overall effect was to drive up shorter-term interest rates across the curve, where 2-year bonds currently stand at more than 10 percent, a better measure of the real cost of borrowing in the Turkish economy than the one-week repo rate.
At its monthly policy meeting, the central bank held the one-week rate its declared policy instrument - unchanged at 5.75 percent as expected and said it would maintain its tight monetary stance for some time to ensure inflation came down in line with medium-term targets.
The decisions added to weakness for Turkish shares, which performed as much as five times worse than a broader index of emerging stock markets before recovering in late trade.
The yield on the benchmark bond maturing on Dec. 4, 2013 increased to as high as 10.40 percent from 10.31 percent before the decision. It finished at 10.34 percent, virtually unchanged from the previous close.
"The bank increased the size of one-month repo auctions. As the interest rate is higher at these auctions, average cost of (banks') lira funding from the central bank will rise. Hence, yields climbed," said Erkin Isik, a strategist at TEB.
The bank said between Jan. 27-Feb. 23 the upper limit of each one-month repo auction would rise to 5 billion lira from 3 billion and the upper limit of total funding will rise to 20 billion lira from 12 billion before.
The most recent one-month repo operation saw rates of 11.34 percent.
By 1551 GMT, the lira traded at 1.8246 versus the dollar, after touching its strongest level since early December of 1.8165 in early trade a reflection of the generally stronger global mood this month and successful debt auctions.
Weakened by the bank's decision, it traded against a dollar-euro basket at 2.0968 down from 2.0958 in late trade on Monday.
"The fact that the central bank halted forex selling auctions weakened the lira," said Tufan Comert, a strategist at Garanti Securities. "But the currency moved also in tandem with the euro-dollar exchange rate. I expect it to move between 2.09-2.11 versus the (euro-dollar) basket."
The main Istanbul share index closed down 0.72 percent at 54,790 points, largely underperforming the MSCI emerging markets index, which was down 0.21 percent.
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