Turkish assets eased on Friday after J.P. Morgan downgraded Turkish shares to "underweight" from "overweight" citing high inflation, political uncertainty ahead of a June 12 election and an expanding current account deficit. The benchmark February 20, 2013 bond yield rose to 8.97 percent from Thursday's 8.87 percent.
As of 1430 GMT the lira traded at 1.6035 to the dollar, weaker than 1.5995 at Thursday's close. "In Turkey, high inflation, a deteriorating current account deficit and relatively complacent policy worries us. The hikes in reserve ratio requirements (RRRs) have cut consensus earnings forecasts for banks," J.P. Morgan analyst David Aserkoff wrote in a report published on Friday.
Turkish assets gained earlier this week after the central bank left its key interest rate unchanged on Wednesday and did not announce any change in banks' RRRs. The central bank said its policy mix, which relies on lower interest rates to deter inflows of hot money alongside increases in banks' RRRs to ensure an overall tightening effect, had started to have an impact, but this had been delayed by global economic uncertainties.
"After the central bank's interest rate decision, the perception of foreign investors that the central bank is falling behind the market has been strengthened," Tufan Comert, a strategist at Garanti Securities said. "J.P. Morgan's report also contributed to the negative sentiment."
The central bank has raised required reserve ratios (RRRs) five times since November, but there are scant signs the measures are working. Continued strong loan growth of 36.4 percent up until May 13 has reinforced expectations of another RRR hike.
Analysts fear that the strategy adopted by the central bank in December leaves Turkey behind the curve in fighting inflation, particularly as first-quarter growth could reach 9 percent and higher commodity prices weigh. The Istanbul share index fell 2.11 percent to 62,407.42 points at the close of trading, after rising 0.23 percent on Thursday, lagging a 1.2 percent gain in the MSCI emerging markets index. On the stock exchange, technology company Kron Telekom rose 3.64 percent on its debut day following the sale of a 39 percent stake.