ISTANBUL: Turkish bonds rose and the lira weakened slightly on Friday after the central bank hinted it could cut its borrowing rate if the lira firms excessively following Turkey's upgrade to investment grade by Fitch.
Shares dipped slightly as investors awaited third-quarter results from state-run lender Vakifbank and petrochemicals maker Petkim.
Central Bank Governor Erdem Basci signalled on Friday that the bank may adjust its overnight borrowing rate, the lower end of its interest rate corridor, or the policy rate, the one-week repo rate, if the lira strengthens excessively.
"Interestingly the central bank Governor Basci is on the wires indicating that the bank could/would cut the lower end of the interest rate corridor, the borrowing rate, if forex appreciation pressures build ... likely to add another leg to the local bond rally," wrote Timothy Ash, Standard Bank head of EM research.
Bond yields fell after Basci's comments. The two-year benchmark bond yield dropped to as low as 6.70 percent. By 0926 GMT, it was trading at 6.71 percent, down from Thursday's close of 6.74 percent.
After credit ratings agency Fitch upgraded Turkey to investment grade on Monday, the two-year benchmark bond yield has fallen and on Friday it hit a new all-time low of 6.69 percent.
A lower borrowing rate would lower the cost of funding for banks from the central bank, allowing them to have more resources to buy bonds.
Since late 2010, Turkey's central bank has been using an unorthodox policy mixed based on daily liquidity management, a low policy rate and high required reserve ratios.
The lira eased slightly to 1.7885 to the dollar, from 1.7859 late on Thursday. Against the euro-dollar basket , it weakened to 2.0339, from 2.0268.
Since markets started pricing in a credit rating upgrade by Fitch in early October, the lira firmed around 2 percent against the dollar and 3 percent against its euro-dollar basket.
"I don't think the current levels of the lira would be enough to push the central bank to cut its overnight borrowing rate," said Erdinc Mogol, manager at Akbank's treasury marketing unit.
"But the markets will push it. If the lira firms below 2 against the (euro-dollar) basket, they would start to expect for such a move from the central bank at any time," Mogol said.
Istanbul's main share index was down 0.15 percent at 72,540 points, in line with a 0.22 percent fall in the global emerging markets index.
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