Bloomberg News

Lira Falls to Record Low as Inflation Bolsters Rate-Cut Bets

October 03, 2011

Oct. 3 (Bloomberg) -- The lira weakened to a record-low as slowing inflation spurred speculation the central bank will keep cutting interest rates and concern Europe’s credit crisis will worsen damped investor appetite for emerging-market assets.

The lira depreciated 1 percent to 1.8787 per dollar at 7 p.m. in Istanbul, the weakest level on a closing basis since at least February 1981 when Bloomberg began tracking the data. The currency has declined 18 percent this year.

Turkey’s currency is the second-worst performer after South Africa’s rand among more than 20 emerging-market currencies as the central bank cut its benchmark rate three times since December to buoy the economy and concern deepened policy makers would struggle to contain prices increases. Inflation slowed to 6.2 percent in September from 6.7 percent a month earlier, the statistics office in Ankara said today.

“Given the adverse growth environment, we think that the central bank would still cut rates” when markets settle down, Tatha Ghose, senior emerging-market economist at Commerzbank AG in London, said in e-mailed comments.

Emerging-market stocks fell the most in a week today as European officials prepared to discuss how to shield banks from the debt crisis and boost the region’s rescue fund after Greece missed a deficit target for 2012.

Turkey’s two-year lira-denominated bonds gained, driving down yields one basis point, or 0.01 percentage point, to 8.40 percent, according to the RBS Istanbul Benchmark Bond Index.

While the central bank cut rates to spur growth, it raised reserve requirements to curb lending to contain the current- account gap. The country’s 12-month current-account gap widened to a record $74.6 billion in July, equivalent to about 10 percent of gross domestic product.

Yield Outlook

The yield on the two-year bond may retreat to 7.5 percent in the next three to six months as the central bank cuts rates, Gizem Oztok Altinsac, an Istanbul-based economist at Garanti Securities, said in an e-mailed note today. Policy makers may cut banks’ reserve requirements by 500 basis points in the next year, he said.

Central bank Governor Erdem Basci predicted inflation probably will accelerate in the fourth quarter. While a year- earlier jump in food prices capped the headline rate in September, the bank’s preferred measure of core inflation jumped to a 2 1/2-year high.

Annual core inflation excluding energy, food, tobacco and gold prices accelerated to 7 percent in September from 6.2 percent a month earlier, exceeding the rate of headline inflation for the second time this year.

--Editors: Stephen Kirkland, Peter Branton

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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