ISTANBUL, July 8 (Reuters) - The Turkish central bank sold a record $2.5 billion of dollars at auction to lift the lira from its weakest ever levels on Monday but analysts said the currency's gains may be hard to sustain unless interest rates rise.
The central bank sold the dollars at seven separate auctions and said it was beginning strong, additional monetary tightening which governor Erdem Basci later told economists was intended to curb loan growth rather than support the lira.
The Turkish currency has lost as much as 6 percent of its value against the dollar since late May. It fell to 1.9737 against the dollar early on Monday before rebounding to 1.9513 by 1446 GMT after the central bank's auctions.
But with global markets adjusting to the prospect the United States will scale back stimulus measures that have pumped up asset prices and pushed down yields, some analysts said spending reserves to defend the currency may be a short-lived solution.
'In a world of high yields, the current ceiling of the interest rate corridor is unlikely to support the lira and spending reserves is unlikely to do the trick either,' said Inan Demir, Finansbank chief economist, in a research note.
'Given the central bank is reluctant to hike any of its policy rates, we continue to think that further lira weakness is on the cards.'
Economists who met Basci said he had told them changes to the interest rate corridor would be made only if the liquidity tightening fails to prevent excessive loan growth. The bank said in a statement the moves would be 'strong, effective, temporary'.
Weeks of anti-government protests in Turkey have exacerbated a sell-off in emerging market and other risk assets triggered by the U.S. Federal Reserve's signal in May that it would soon start to curtail its bond-buying with newly printed money.
Turkey's central bank has been holding intraday forex auctions since June 11 to support the weakening lira and has sold a total of $4.9 billion of foreign currency reserves.
Analysts said pressure was increasing on the central bank to widen the interest rate corridor by raising its overnight lending rate at its policy meeting this month, but most felt it would stick to selling reserves for the time being.
'Under current circumstances, developments in lira will continue to determine the bank's stance, and the bank will continue forex-selling auctions until its monetary policy meeting on July 23,' said Ali Cakiroglu, strategist at HSBC Asset Management.
Trading volumes for Turkey's benchmark bond maturing on May 13, 2015 were at historic lows while the yield on the 10-year bond maturing on March 8, 2023, was at 8.93 percent after briefly easing earlier in the day.
The downward pressure on lira also weighed on Turkish stocks. Coupled with the falls in emerging market stocks, the main Istanbul stock index dropped by 1.96 percent to close at 71,682.30 points.
'The central bank has carried out the biggest forex sale of its history, but the fact that the dollar/lira has still not come down a lot is further increasing the (downward) pressure on banking stocks,' Is Yatirim trader Ozgur Alioglu said.
(Reporting by Nevzat Devranoglu and Evren Ballim, Writing by Humeyra Pamuk; Editing by Catherine Evans) Keywords: MARKETS TURKEY/
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