April 30, 2012 / 3:56 PM / 6 years ago

UPDATE 1-Tight policy outlook supports Turkey's lira, bonds

* Lira firms further, yields down on hawkish central bank

* Trade deficit in-line with forecast

* Shares fall; investors eye Arcelik, Akbank Q1 results (Adds fresh prices, quotes)

ISTANBUL, April 30 (Reuters) - The Turkish lira strengthened and bond yields fell on Monday after the central bank adopted a more hawkish tone last week, signalling that it plans to keep a tight grip on inflation, but shares fell after lender Akbank’s weak first-quarter results.

By 1440 GMT the lira traded at 1.7580 versus the dollar compared with 1.76 late on Friday. Against a euro-dollar basket the lira stood at 2.0424, compared with 2.0458 on Friday.

The central bank said last week that it is ready to do all it can to hit its 5 percent inflation target by mid-2013, and would implement additional monetary tightening if it saw a threat to reaching that goal.

Turkish inflation remained at 10.4 percent in March, well above the central bank’s year-end target of 6.5 percent. The bank aims to get inflation down to 5 percent by the middle of next year, suggesting it will pursue a tight monetary policy.

The bank’s policy meeting minutes “underscore more frequent additional tightening in the period ahead,” said Finansbank economist Inan Demir.

“Lower food inflation, lira appreciation, or a combination of both is necessary to attain CBRT’s year-end inflation projection,” he said, adding that this would keep the central bank “very sensitive” to the exchange rate until headline inflation eased significantly.

Turkey’s trade balance, a major vulnerability at around 10 percent of gross domestic product, narrowed in March to $7.35 billion from $9.83 billion a year ago - a touch slimmer than the $7.6 billion deficit forecast in a Reuters poll.

“We know that the improvement is still gradual, but at least the last five months’ data (except January) confirmed that the deterioration in the foreign trade balance is over,” said Ozgur Altug, an economist at BGC Partners.

“We continue to foresee that in the absence of a severe recession the improvement in external balances will be gradual. This means that FX demand in the market will ease, but to a very limited extent.”

The two-year benchmark bond yield fell to 9.32 percent, down from a previous close at 9.36 percent after trade gained volume in afternoon session.

“The positive sentiment in bonds market prevails following the central bank’s inflation report,” an Istanbul-based bonds trader said.

“We saw high volume especially in longer maturity bonds, we think it’s due to the bank’s determination to fight inflation,” he added.

The main stock index fell 0.97 percent at 60,010.42 points, underperforming a gain of 0.48 percent in the MSCI emerging markets index.

Disappointing first quarter results from Akbank spoiled the mood in the Istanbul Bourse, taking the banking index 2 percent lower by the end of Monday trading.

Akbank’s first-quarter net profit dropped 25 percent to 555.6 million lira ($315.54 million), from 744 million lira in the same period of last year. The stock fell more than 2 percent to 6.52 lira.

“The Istanbul Stock Exchange is decoupling negatively from its foreign peers as first quarter results of banks signal a significant slowdown in 2012 and the banking sector is underperforming as a result,” Ata Portfoy fund manager Cem Tozge said.

“The fall in bond yields is supposed to positively affect banks, but we can’t see that happening at the moment.”

White goods maker Arcelik shares closed 1 percent higher at 7.70 lira after the company posted a 42 percent rise in sales in the first quarter. (Reporting by Seda Sezer and Ece Toksabay; Editing by Ruth Pitchford)

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