ISTANBUL: The Turkish lira firmed on Tuesday as the central bank continued with additional monetary tightening via an intraday repo auction and bond yields steadied ahead of the treasury's tap of the benchmark bond.
The lira has been supported by additional monetary tightening since Friday, after data showed annual inflation jumped above 11 percent in April. However, industrial output data released on Tuesday suggested the economy is no longer overheating and economists expected it to slow in coming months.
Turkish industrial production rose 2.4 percent year-on-year in March, Turkish Statistics Institute data showed, beating a Reuters poll forecast for an increase of 2.25 percent.
Compared with a month earlier, however, output rose just 0.7 percent seasonally adjusted.
"The seasonally adjusted data indicated the economy is balanced at this level. We expect the slowdown in the economy to be more significant in the coming period," said Tufan Comert, a strategist at Garanti Securities in Istanbul.
"So, the central bank may need to use its exceptional days policy less frequently. But, it would keep the monetary policy stance still tight as inflation has still a long way to go before reaching the target," Comert added.
Turkey's central bank has been applying what it calls an "exceptional days" policy since Friday in the wake of the April inflation data.
The "exceptional days" policy mainly consists of the bank holding intraday repo auctions at which it charges borrowers higher rates than at its usual repo auctions to provide lira liquidity.
As of 0749 GMT, the lira traded at 1.7621 versus the dollar, slightly stronger than 1.7632 late on Monday. Against a euro-dollar basket it traded at 2.0289, firming from 2.0312.
The central bank followed up on Monday's additional monetary tightening by holding an expensive intraday repo auction to inject 3 billion lira into the markets.
The average yield at the latest intraday repo auction stood at 10.76 percent, almost double that at the bank's usual repo auctions where the rate is fixed at 5.75 percent.
"We expect the lira will continue to strengthen and will firm below 2.0 versus a euro-dollar basket. The decline in oil prices is positive for the inflation outlook," Fatih Keresteci, a strategist at HSBC, wrote in a note.
Since late 2010, the central bank has been trying to support the local currency while keeping inflation and the current account deficit in check and has more recently been trying to balance rising inflation against slowing economic growth.
That has led to a multi-tool policy mix using variable daily injections of lira funding, a flexible corridor between base lending and borrowing rates and high bank reserve requirements.
Two-year bond yields stood at 9.46 percent, unchanged from a previous close.
Investors were awaiting a debt auction later in the day when the Treasury will tap the current benchmark bond maturing on March 5, 2014.
"We think the auction will be successful which also would affect positively the secondary bond market," Keresteci wrote.
The main stock index was up 0.4 percent at 59,019 points, outperforming a 0.2 percent slide in the MSCI emerging markets index.