ISTANBUL: The Turkish lira rose and bond yields held firm on Thursday after the central bank kept its 2012 inflation forecast unchanged and reinforced market expectations of additional policy tightening.
Presenting new inflation forecasts that commercial bank economists still view as on the low side, Governor Erdem Basci said the bank wanted to send a "strong signal" to markets that it was ready to do all in its power to hit its 5-percent inflation target.
He said the bank would implement additional monetary tightening if it saw a threat to its reaching the target, prodding the lira to 1.7656 against the dollar from 1.7706 late on Wednesday. Against a euro-dollar basket , it firmed to 2.0515, from 2.0541.
"We got confirmation that they will keep monetary policy tight to maintain the inflation targets and this is very supportive for the lira. I target the lira at year-end at 1.65 per dollar," said Murat Toprak, emerging markets strategist at HSBC in London.
The currency had touched a seven-week high of 1.7697 on Wednesday, supported by a steadying in global appetite for risk, undermined earlier this month by worries a reintensification of debt tensions in the euro zone.
"With the recovery in global risk sentiment after strong corporate profits, the dip in oil prices and the US Federal Reserve comments, we saw strong inflows to the lira and long-term bonds," said the head of pension funds at a portfolio company in Istanbul.
Federal Reserve Chairman Ben Bernanke on Wednesday said the central bank would not hesitate to launch another round of bond purchases if the economy were to weaken.
Istanbul's main stock index rose 0.57 percent, virtually in line with a 0.49 percent rise in the MSCI emerging markets index.
YIELDS ON LONG-TERM BONDS DOWN
Turkey's two-year benchmark bond yield stood at 9.43 percent, virtually unchanged from a previous close at 9.44 percent.
"There isn't an important change in the bond market but expectations that additional tightening would continue longer than expected created a sell-off in bonds with a maturity of less than 1 year. Yields on long-term bonds are falling," said Tufan Comert, a strategist at Garanti Securities.
The central bank uses an unconventional monetary policy which involves variable daily injections of lira funding, a flexible corridor between overnight lending and borrowing rates, high bank reserve requirements, and a low policy rate to bolster the lira and tackle inflation.
"Although the market will buy this story in the short term, we expect the Bank to go through more tests regarding its ambitious inflation projections down the road," said Burcu Unuvar, a senior economist at Is Invest.
Turkey's inflation remained at 10.43 percent in March, almost double the bank's year-end target. The central bank expects recent energy prices hikes to push up inflation by 0.5 percentage points in April. It would then gradually decline from the third quarter, according to the bank's expectations.
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