ISTANBUL: The Turkish lira extended its gains on Tuesday following an earlier sell-off and bond yields edged down, while the central bank stuck to its tight policy stance, which is expected to support the lira.
The central bank kept all key interest rates on hold at its monthly policy meeting on Tuesday and said it would use extra short-term liquidity tightening if needed to prevent any deterioration in inflation expectations.
By 1425 GMT, the lira traded at 1.8290 versus the dollar , stronger than 1.8370 late on Monday. Against a euro-dollar basket it stood at 2.0615, firming from 2.0703.
"Global reaction buying after the heavy sell-off helped the lira to recover. Today's decisions of the central bank wouldn't affect the lira directly but as the bank will keep monetary policy tight, the lira should outperform its emerging peers," said Tufan Comert, strategist at Garanti Securities.
Turkish consumer inflation stands at 11.1 percent, far above the central bank's year-end target of 5 percent, pushing the bank to provide expensive liquidity through intraday repo auctions more often, aiming to counter the effects of the lira's weakness on inflation.
The bank also said on Tuesday that it had raised the limit on the amount of lira reserve requirements that can be held in foreign currency to 45 percent from 40 percent, boosting the bank's forex reserves by $2.1 billion.
"This suggests that the CBRT (central bank) is seeking further firepower to defend the lira," wrote William Jackson, emerging markets economist at Capital Economics.
The central bank has also reduced the volume of funding in fixed-rate repo auctions on regular days to 1 to 5 billion lira from the previous 1 to 6 billion lira, until the next monetary policy committee meeting on June 21.
"These moves will tighten liquidity conditions but the impact should be offset by allowing banks to use foreign currencies to cover a larger share of their lira reserve requirements," Jackson wrote.
The yield on Turkey's benchmark bond maturing on March 5, 2014, closed at 9.40 percent, from a previous close at 9.45 percent.
"Although there is a tiny decline in yields, tight monetary policy would affect negatively the short term bonds and push the demand to long-term bonds," Comert said.
Tight liquidity and high funding costs usually push commercial banks to sell bonds in order to meet their cash needs.
The central bank has maintained a complex policy mix since late 2010 based on variable daily injections of lira funding, a flexible corridor between base lending and borrowing rates and high bank reserve requirements, to keep inflation and a huge current account deficit in check.
The main stock index closed 1.1 percent up at 55,449 points, in line with a 1.48 percent rise in the MSCI emerging markets index.
Dogan Holding gained 5.88 percent after saying its Dogan Enerji unit had agreed to buy all shares of Akdeniz Elektrik Uretim and Galata Wind Enerji in a deal valuing the companies at a total of 240 million euros ($300 million).
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