Turkish markets close mixed on rate hike signals

ISTANBUL, May 1 (Reuters) - Turkish stocks fell on Thursday while the lira firmed as investors shifted to overnight deposits from fixed-income or foreign exchange investments on expectations that the central bank will hike interest rates.

The Jan. 13, 2010 benchmark bond's yield <0#TRTSYSUM=IS> touched its highest in a year at 19.54 percent and closed the day at 19.29 percent versus the previous day's 19.13 percent.

"Interest rate rise expectations cause the market instruments to move separately. The bond yields rose on the assumption that rate hikes will last long and market players sold foreign currency holdings to park in overnight deposits," said Cengiz Kilic, a portfolio manager in Demir Life Insurance.

The Turkish central bank signalled on Wednesday there were interest rate rises ahead, as it sharply raised its inflation forecasts.

"The equity market naturally perceived interest rate signals and official recognition of negative inflation trend," Kilic said.

The main stock market index .XU100 lost 1.85 percent to close at 42,664.37 points, while the lira IYIX= firmed one percent to 1.2775 against the dollar from 1.2900.

Governor Durmus Yilmaz's comments, made on Wednesday as he presented a quarterly inflation report, were read as more hawkish than before and he said that the bank had based its forecasts on the assumption that monetary policy would be tightened.

The bank cut rates from September to February, before holding the benchmark rate steady at 15.25 percent in March and April.

In a sign of fiscal loosening, Finance Minister Kemal Unakitan said on Wednesday Turkey would cut its primary surplus targets under a medium-term economic plan. An official told Reuters that the move was aimed to stop a slowdown in the economy. (Reporting by Selcuk Gokoluk, editing by Mike Peacock)