Turkish lira, markets strengthens as inflation hits nearly 40-year low

The yield on the busiest Feb. 2, 2011, bond traded at 11.87 percent from Monday's close of 12.22 percent after touching a historic low of 11.69 percent earlier in the day. The lira currency strengthened nearly 1 percent and traded at 1.56 levels against the dollar from Monday's 1.5796.

Consumer prices rose 0.02 percent, less than expected, in April for an annual rate of 6.13 percent, approaching the central bank's year-end forecast of 6 percent, the Turkish Statistical Institute said on Monday after markets closed.

Economists said it was the lowest rate since 1970, including adjustments in the measures used for inflation.

'Even if the economy isn't growing now, the fall in inflation makes it more likely the (central bank) will lower interest rates,' said Emre Balkeser, a trader at Finans Invest.

'This is on top of the underlying optimism in global markets,' Balkeser added.

The main share index gained nearly 3 percent and traded above 33,000 points in afternoon trade.

The Istanbul index has risen about 28 percent since the start of April on increased risk appetite following signs the U.S. economy may start recovering.

The central bank has reduced interest rates every month since November for a total of 700 basis points, to bring its overnight borrowing rate to 9.75 percent and its lending rates to 12.25 percent, historic lows for the benchmarks. Its monetary policy committee next meets on May 14.

The rate cuts are aimed at boosting economic growth in Turkey, where the gross domestic product shrank 6.2 percent in the fourth quarter, its first contraction since 2001.

Balkeser said investors were also upbeat about Prime Minister Tayyip Erdogan's decision at the weekend to reshuffle his cabinet and name Ali Babacan, the former foreign minister, as economy minister. Babacan held that post from 2002 to 2007, when the economy averaged 7 percent annual growth.

'The new economic team is a plus,' he said. 'There's still the expectation that the government will sign with the IMF at the end of this month.'

The International Monetary Fund and Turkey have been in protracted talks on a lending pact that could be worth $25 billion or more.

The loan is to help the government and businesses cover their foreign-denominated debt payments after the lira slumped against the dollar and the global financial crisis sapped demand for Turkish exports.