Turkish stocks and bonds fall in aftermath of interest rate hike

ISTANBUL – Turkish shares and bonds fell yesterday as investors weighed up the impact of an interest rate hike and central bank dollar sales, while the lira rebounded from losses caused by high inflation and political woes. Economists welcomed the policy action as a sign of greater decisiveness on the part of the central bank, but investors remained cautious amid underlying emerging market nervousness. The lira firmed 3 percent to 1.6565 against the dollar at the close on the interbank market from 1.7085 on Friday, but was still down 20 percent from the end of April. Investors were also awaiting this week’s statement from the Federal Open Market Committee and an expected US rate hike. «Turkey is taking the right steps and if we get a relatively dovish statement from the FOMC on Thursday night, that could go a long way to settling things down,» said Sarah Hewin, an economist at American Express. «These are tough times for the lira and emerging currencies in general… My sense is that it will stay tough for the lira for a while yet,» she said. After an extraordinary meeting on Sunday, the central bank increased the overnight borrowing rate to 17.25 percent and the lending rate to 20.25 percent, saying it would not allow market volatility to harm inflation’s medium-term downtrend. «The move could well provide some short-term relief for the market but we still sense that the overwhelming market view on Turkey at present is negative and investors will still likely sell into strength,» said Bear Stearns economist Timothy Ash. Yesterday, the bank began dollar sales auctions and lira purchase auctions to ease lira liquidity and then intervened directly in the forex market. Bankers estimated the total value of the intervention at $500 million to $800 million. Yields on the secondary bond market rose, with the April 9, 2008 benchmark at 22.80 percent, up from 20.50 at Friday’s close. The benchmark yield stood at 13.8 percent at the end of last year. Shares down 20 pct in 2006 The main share index ended down 3.57 percent at its lowest 2006 close as dealers weighed up the earnings impact of the rate hike and looked ahead to an expected US rate rise this week. The ISE National-100 index fell 1,182 points to close at 31,950.56, marking a 20 percent decline since the end of last year. It was the lowest close since end-October. The central bank intervention had been anticipated by economists as a further step to enhance its credibility. «This time they should not be hesitant like they were on Friday. This action has the potential of leading to a rapid improvement in forex liquidity and hence sentiment,» said JP Morgan Chase economist Yarkin Cebeci. The initial fall in the lira in early May was triggered by higher-than-expected April inflation figures and the slide was fueled by worries about the country’s large current account deficit and capital flight from emerging markets generally. Political concerns are a growing factor in the slide, driven by speculation about early general elections and uncertainty over who will be the next president amid strains between the Islamist-rooted ruling party and the secularist establishment. Fears that the Cyprus issue could obstruct Turkey’s progress toward European Union membership are also unsettling investors.

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