ISTANBUL: The Turkish lira firmed and bond prices surrendered some of their early gains on Tuesday as a higher inflation outlook and central bank comments boosted expectations that liquidity will remain tight for some time.
Turkey's inflation dipped to 0.41 percent month-on-month in March, but remains near three-year highs on an annual basis and, given other expected pressures on prices, was seen as unlikely to change the bank's broader hawkish tone.
After recent hikes in energy prices, most analysts revised up their year-end inflation forecast, stimulating expectations that the tight monetary conditions will remain in place in the coming period.
By 1433 GMT, the lira traded at 1.7778 versus the dollar, stronger than 1.7840 late on Monday. It also firmed against a euro-dollar basket and stood at 2.0726 compared with 2.0772 on Monday.
"The lira-dollar rate moved in a narrow range. Investors expect the central bank to continue with its tight monetary policy. Despite today's optimistic inflation data, inflation will jump in April due to price hikes," said Pinar Uslu, strategist at ING's affluent banking department.
"I think 1.7715 is an important level. The lira would need more support from external markets to firm below this level," Uslu added.
The Energy Market Regulatory Board raised electricity prices by an average of 8.l percent from April 1 while Energy Minister Taner Yildiz said separately that natural gas prices would go up by an average 18.72 percent from the same date, citing forex rates and oil price rises.
"After the price hikes in energy, we raised our year-end inflation forecast at 7.2 percent from an earlier 6.5 percent," said Gizem Oztok, economist at Garanti Securities.
The central bank told economists at a meeting on Tuesday that the hikes in energy tariffs would push up annual inflation by 0.52 percentage points and the bank would rather adjust monetary stance than revise up its inflation target, economists at the meeting told Reuters.
In March, annual consumer price inflation stood at 10.43 percent, almost double the central bank's year-end target of 5 percent.
Turkish bond prices, which dropped after the lower-than-expected inflation figures, surrendered some of their gains after the central bank's comments. The two-year benchmark bond yield closed at 9.34 percent, after touching 9.25 percent following the inflation data and compared with a previous close of 9.38 percent.
"Today the benchmark yield closed lower than yesterday but this is not a significant fall. It is mostly due to a lower lira funding cost as the central bank has been holding cheap repo auctions since last Friday. We saw some selling after the central bank's comments" Uslu said.
Most traders said the decline in bond yields would be limited under tight monetary policy, as it raises banks' funding costs, leaving them less funds to buy bonds.
The central bank shifted to a hawkish policy stance last month and had tightened sharply lira liquidity through expensive intraday repo auctions between March 22 and 29 to avoid lira depreciation and to tackle inflationary pressures.
Since last Friday, the bank has resumed its cheaper one-week repo auctions at a fixed rate of 5.75 percent, cutting banks' funding costs to 8.87 percent on Tuesday, from 10.29 percent last Thursday.
Istanbul's main stock index closed 0.5 percent up at its highest since July at 63,284 points, underperforming a 0.80 percent rise in the MSCI emerging markets index.
Analysts said that buying in the stock market accelerated after the index broke above the technical 63,000 level and the lower-than-expected inflation figures contributed to the positive mood.
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