Turkey's benchmark bond yield struck a six-week high on Friday amid market confusion over the scale and timing of further rises in required reserve ratios, which the central bank said it would make to offset a rate cut. The bank on Thursday surprised markets by cutting its policy rate to 6.25 percent from 6.5 percent, a second successive cut, but also said it would raise required reserve ratios to ensure its moves had an overall tightening effect on monetary policy.
Many in the market had expected an announcement on the increase in reserve ratios early on Friday, following a trend set at the time of the bank's December rate cut, but none was forthcoming. Most analysts expect a hike to the reserve rate on lira deposits of 150-200 basis points, taking the rate to 9.5-10 percent.
A source told Reuters that Turkey's central bank assembly would meet on Monday and would probably decide on the change in reserve ratios then. "We may see a yield of 8 percent on the benchmark. Foreigners are selling as nobody can foresee what will happen, there is uncertainty," said another banker. The yield on the benchmark November 7, 2012 bond rose to 7.67 percent at the close of trading, after rising to as high as 7.76 in earlier Friday trade. The spot close on Thursday was 7.51 percent, up from 7.36 percent at Wednesday's close.
In Monday-dated trade the yield was at 7.67 percent. The lira fell in the earlier trade and was slightly higher at 1.5684 against the dollar by 1545 GMT, after closing at 1.5795 on Thursday. The central bank slashed short-term interest rates by 50 basis points to 6.5 percent last month. It was aiming to counter destabilising capital inflows that were spurring sharp lira gains, boosting imports and putting pressure on a worryingly high current account deficit. It also raised banks' reserve requirements to curb credit growth and remove inflationary pressures.
Analysts noted that in cutting rates a second time the bank would tolerate further lira weakness, predicting it could ease to around 1.6 to the dollar. "We couldn't understand what the central bank is trying to do. Nobody can," said Mehmet Besimoglu, chief economist at Oyak Securities.
Many analysts predict that, in allowing the lira to weaken, the central bank could risk a rise in inflation and currency volatility, meaning it may have to raise rates again at the end of the year. The main Istanbul share index rose slightly, snapping five days of losses, up 1 percent to 65,927.31, while the MSCI emerging equities index dropped 0.4 percent.
"There is some short covering in the market, its a technical move as the index was oversold," said Altug Dag, a trader at EFG Istanbul Securities. Media group Dogan Yayin gained 4.06 percent to 2.05 lira after Bloomberg Businessweek magazine reported that Time Warner Group would be interested in Dogan Yayin's asset sale depending on pricing and the political environment, citing Time Warner CEO Jeff Bewkes.
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