Turkey's benchmark bond yield rose to 7.31 on Friday from 7.19 percent, after comments from the central bank governor increased bets the bank won't cut interest rates at its January 20 meeting. Governor Durmus Yilmaz said on Thursday Turkey's rising current account deficit was a major risk and loan growth was approaching worrying levels, but he also noted using rates alone would not prevent further widening of the deficit.
"The perception is strengthening that there won't be a rate cut in the central bank monetary committee meeting next week, creating a strong sell-off in the secondary market rate," said Fatih Keresteci, a strategist at HSBC Bank in Istanbul. The main Istanbul share index dropped 1 percent to 67,879.62 points, while the MSCI index of emerging market shares were down 0.3 percent. Turkish banks lead the decline.
"The fading hopes for a rate cut is pressuring bank profits and it seems Turkey is going to underperform for a while," said one trader. Isbank, the country's largest listed lender by assets, dropped 2.5 percent to 5.42 liras at the close of trading. Akbank, a Turkish bank in which Citigroup has a 20 percent stake, fell 2.1 percent to 8.46 liras.
Markets had speculated that the bank may make a second rate cut in January, but after the lira touched its weakest level to the dollar in six months on Monday and the governor's comments, most analysts now expect the bank to hold rates. The central bank last month cut its policy rate by 50 basis points to 6.50 percent in a surprise shift of policy to make Turkish yields less attractive to portfolio investors. At the same time the bank raised required reserve ratios to drain liquidity and curb credit growth.
The bank's monetary policy committee meets next Thursday. The yield on the benchmark November 7, 2012 bond rose to 7.31 percent from 7.19 percent on Thursday. It hit an all-time low of 6.87 percent on January 6. The lira was little changed at 1.5483 per dollar, from 1.5479 on Thursday.
"The central bank did not explicitly indicate that it would cut further, but we believe scope for any further easing is quite limited," wrote RBC analysts including Paul Biszko in Canada on Friday. "The central bank is playing a very risky game by cutting interest rates when domestic demand is still growing robustly, real interest rates are negative and the current account deficit is running near 6 percent of GDP."
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