Lira Marks the Biggest Decline in 2 Weeks as Central Bank Cuts Interest Rate

The major currency of Turkey, Lira had its biggest decline in last 2 weeks because of the interest rate cuts introduced by the Central Bank of the country. The yields also closed near record low figures. Lira actually was the biggest loser if all the prominent emerging market currencies are considered. The overnight borrowing was decreased by the Central Bank and the lending rates were cut by 25 basis points as well. The overnight borrowing is currently at 4.5%, whereas, the lending rates are at 8.5%. The decision, however, was predicted by many of the economists.

According to Nordea Markets’ analyst, Annika Lindblad, Lira weakening was mostly dependent on the decision of the Central Bank. Annika added that the Central Bank will now be closely monitoring the currency as they are worried of too much appreciation pressure, particularly from the speculative capital inflows. Annika commented further that investors should be careful while dealing with Lira, at least for the next few days.

Lira declined by 0.7% at one point of time of the day, however, later gained a bit to decrease by 0.5% from yesterday’s value. The same is now priced at 1.7759 per USD. Today’s drop in Lira is the biggest since 4th February. The yields experienced a drop of 10 basis points and are at 5.66% now; just a basis point below the record low figure.

However, during its meeting of the Monetary Policy Committee, the benchmark one-week repo rate was kept unchanged at 5.5% by the Central Bank. Apart from that, the effective foreign exchange reserve requirement ratio was increased to 11.5% from its previous value of 11.1%. The Central Bank actually made a withdrawal of $940 million in liquidity from the market. That’s not all, as the effective Lira reserve requirement was also increased to 11% from its previous value of 10.8% for all the maturities.

Slowing down the inflation is a big concern for Turkey at this point of time and the Governor of Central Bank, Erdem Basci is constantly looking out for ways to slow inflation to 5% in 2013. Apart from that, Basci is also seeking to curb the loan growth to 15%. Incidentally, the lending increased by 19.1% in the last 12 months till 8th February. The data was published by the banking regulator on 18th February.