Turkish lira falls for 4th day, rate rise bets grow

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Worries about rampant inflation pushed the Turkish lira down for a fourth straight day on Wednesday, with money markets pointing to growing expectations of another sharp rise in interest rates.

The lira fell 0.7 percent to 4.7120 to the dollar after also being hit hard on Tuesday when data showed June consumer price inflation jumped to a 14-year high and the monthly rate was almost double what analysts had forecast.

The lira has already lost around 20 percent of its value this year, even though the central bank has raised rates by a total of five percentage points since April to 17.75 percent, hoping to support the currency.

Cristian Maggio, head of emerging market strategy at TD Securities, said the inflation data had been atrocious and was not the end of the upward move.

“Bad inflation translates into a negative lira reaction, which translates into faster inflation, and that becomes a self-reinforcing loop,” he said, adding that the central bank will have to raise rates again at some point, even if holds off at its next meeting planned for July 24.

Investors have expressed concern over the bank's ability to rein in inflation with President Tayyip Erdogan - a self-described “enemy” of interest rates - calling for lower rates and saying in May he would exert more pressure on the central bank after elections last month, which he subsequently won.

Money markets, where commercial banks lend to each other, seem increasingly convinced that rates will go up.

Traders were quoting just under 20 percent on three-month rates, an all-time high for Reuters records which go back to mid-2010.

“The swap market is pricing in a 75 basis point rate increase in the next three months, which is not a number that would ease existing inflation worries,” said one banker who declined to be named.

“Another difficult time awaits us in terms of the lira. If the dollar/lira rate stays above the 4.70-4.71 level, 4.8-4.9 could be tested,” the banker said.

June inflation was driven by unprocessed food costs, the central bank said on Wednesday in its monthly report on price developments, adding that some vegetable and fruit prices were seen correcting in the period ahead due to new supply.

Modest selling on bond markets pushed the benchmark 10-year yield as high as 17.7 percent from 17.39 percent on Tuesday.

The weaker lira helped the main Istanbul stock index to its sixth rise in the last seven sessions, as a weaker currency helps exporters.

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