Turkey's benchmark bond yield fell below 8 percent on Tuesday, its lowest in a year, as markets started to price in easing from the Turkish central bank in the coming period with a lower inflation outlook for next year. The 2-year government bond yield fell to 7.99 percent from 8.08 percent on Monday.
The central bank said last month that elevated food prices are delaying the improvement in the inflation outlook, yet falling commodity, especially oil, prices, are expected to support disinflation foreseen for the next year. "The market is preparing itself for a rate cut in the coming period from the central bank. It's not being priced in the lira yet but short-term bonds are pricing in a 100 basis point reduction in interest rates in the coming 3-6 months," said a banker.
The central bank will meet on Thursday for its monthly rate setting meeting, but economists forecast that high inflation will mean no change to interest rates this month. Turkey is struggling to control inflation which is well above the central bank's year-end target of 5 percent, while economic growth is faltering. Investors are also eyeing Standard & Poor's credit note, due on Friday, with bankers saying that a positive surprise from the rating agency is seen as more likely than a negative one. S&P - which rates Turkey at BB+ with a negative outlook - is the only one of the three major rating firms that does not class Turkey as investment grade.
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