Azernews.Az

By Bloomberg

The lira headed for a one-month low as Turkey’s main opposition party said the nation may be heading for premature elections and the central-bank left all three of its interest rates unchanged, in line with estimates.

The exchange rate weakened 0.6 percent to 2.7243 per dollar at 3:13 p.m. in Istanbul. The lira is this year’s third-worst performer among 24 major developing markets as the dominant Justice & Development Party, or AK Party, struggles to form a coalition government after inconclusive elections June 7. The slide accelerated this week as a suicide bomb near the Syrian border and the deaths of two policemen fueled security concerns.

An early vote is more likely than the formation of an alliance, opposition CHP leader Kemal Kilicdaroglu said in an interview with Yeni Safak newspaper. Deniz Baykal, a former leader of the same party, predicted the country will hold elections in November, Ihlas News Agency reported. Coalition talks are “nothing more than theater,” and the AK Party “doesn’t want to form a government,” he said.

“Collapsing coalition talks would create significant uncertainty and the lira would sell off to new yearly lows,” Bernd Berg, an emerging-market strategist at Societe Generale SA in London, said in by e-mail. “While domestic politics might not impact the central-bank decisions in the short or medium term, it might impact the economic outlook and investor positioning towards the lira.”

‘Cautious’ Stance

The central bank kept the one-week repurchase rate at 7.50 percent for a fifth month, in line with the median estimate in a Bloomberg survey of 18 economists. It also maintained the overnight lending and borrowing rates at 10.75 percent and 7.25 percent, respectively.

A “cautious” monetary policy stance will be maintained by keeping a flat yield curve until there is a significant improvement in the inflation outlook, the central bank said in a statement accompanying its decision. Developments in food and energy prices are “impacting inflation positively in the short term,” policy makers said.

Consumer-price growth decelerated for the first time in five months, to 7.2 percent in June. While that’s down from 9.7 percent in May last year, inflation remains higher than the central bank’s target of 5 percent.

Deteriorating Conditions

The prospects for higher U.S. rates has also heightened concern over the vulnerability of Turkish assets.

Morgan Stanley, which labeled the country as one of the so- called Fragile Five nations most vulnerable to a tightening of U.S. monetary policy cut Turkey’s sovereign credit recommendation to underweight from market-weight in a reported dated yesterday, citing “deteriorating external conditions.”

The yield on two-year government bonds jumped 10 basis points to 9.88 percent, the highest in a month on a closing basis, extending the rise to 186 basis points this year, the most among 21 emerging markets tracked by Bloomberg.

“Considering current inflation dynamics, the political situation, regional issues and Fed rate hike ahead we attach a very low probability to monetary policy easing in Turkey,” Ozgur Altug, an economist at BGC Partners in Istanbul, said in an e-mailed note. “In fact, we think that the central bank needs to tighten.”