* Markets price in solid victory for Prime Minister Erdogan
* Hopes political tension will ease after local polls on
* Lira hits strongest level to dollar since March 7
(Updates for lira)
By Alexandra Hudson and Dasha Afanasieva
ISTANBUL, March 26 Turkish assets firmed on
Wednesday in anticipation of a strong showing for the ruling AK
Party in local elections on Sunday, easing months of political
tensions compounded by a state graft scandal.
The lira firmed to 2.1985 to the dollar at 1543
GMT, its strongest level versus the greenback since March 7, and
gaining from a level of 2.2360 late on Tuesday.
"The scenario that the AK Party is going to win the local
elections with a vote percentage of over 40 percent is being
priced in, and positions are taken accordingly," said a forex
trader. "We see the same scenario has been priced into the stock
"Lira appreciation could have been steeper, but local
institutional demand for the dollar continues despite foreigner
After a drop of 17 percent in 2013, the lira has weakened
around 4 percent this year as a corruption scandal has swirled
around Prime Minister Tayyip Erdogan and his AK party. The
currency touched a record low of 2.39 on Jan. 27, prompting the
central bank to hike interest rates massively the next day.
Stocks also enjoyed a boost on Wednesday after the
government cleared the way for the central bank to pay interest
on banks' lira required reserve deposits.
The central bank has said it may take such a step in a
limited capacity and if needed, to boost liquidity in the
financial system and help counter any economic slowdown.
It had previously paid interest on lira reserve requirements
but stopped doing so in 2010 as loosening global liquidity
flooded Turkey with cheap funding while it sought to cool an
The government made the announcement in the official gazette
published early on Wednesday.
The Turkish bank index closed up 6.94 percent on
hopes of interest rate payments that would boost earnings in the
sector, which has seen profits wane in recent quarters as the
central bank seeks to cool consumer borrowing.
"According to our calculations, this could have a 2-3
percent effect on the earnings (for banks). Positive momentum
could continue in the market today," Odeabank said in a note,
adding that it expected no "immediate aggressive action" to be
taken by the central bank.
The biggest jump was seen in Bank Asya after
Qatar Islamic Bank said it had entered into exclusive
discussions to acquire a stake in the Turkish lender.
Its shares rose more than 22 percent, although Bank Asya's
limited weighting meant it was not the biggest driver of the
The main Istanbul share index, within which banks
make up more than half the weighting, was up 4.69 percent at
67,730.78. It outperformed the main emerging markets index
, which was up 1.13 percent.
Minutes on Tuesday of its March 18 monetary policy committee
meeting showed the central bank was considering paying interest
to banks on the share of their lira deposits they are required
to hold with it.
"It was stated that such a measure could be considered at a
future date if deemed necessary," the minutes said.
"It was indicated that any decision regarding the
payment of partial interest to reserve requirements to be
implemented in the future should be measured and limited."
Improved risk sentiment globally provided additional support
for Turkish markets, amid perceptions that geopolitical tensions
over Ukraine are easing. The United States and its G7 allies
agreed on Tuesday to hold off on more damaging economic
sanctions against Russia unless it goes beyond the seizure of
The news that Moscow's and Kiev's foreign ministers had held
an impromptu first meeting also led investors to believe the
crisis is not heading into a wider armed conflict.
Turkey's 10-year benchmark bond yield fell
to 10.8 percent from 11.06 percent at Tuesday's close.
(Additional reporting by Nevzat Devranoglu, Ece Toksabay,
Editing by Catherine Evans)