Turkish lira drops, leading losses for emerging market currencies

Turkey’s lira fell on Monday, leading declines among major emerging market currencies as investors fretted over rising global interest rates and inflation.

The lira slid by 1.6 percent to 7.66 per dollar, more than doubling losses this year to almost 3 percent. It was its lowest level since Dec. 24. The MSCI International Emerging Market Currency index dropped 0.4 percent to the weakest in three months.

The Turkish lira had led a rally in emerging markets in the early part of the year, rising more than 7 percent to as strong as 6.89 per dollar by mid-February. But concerns about the global economy and Turkey’s own economic and monetary policy mix have reversed those gains - the currency is trading 10 percent lower from its Feb. 16 peak.

Some emerging markets may face an unenviable choice between hiking domestic interest rates or letting their currencies weaken, Neal Shearing, chief economist at Capital Economics in London, said in a report to clients on Monday.

"If bond yields continue to rise, not only will the policy response differ between countries, but so will the extent of the economic pain," Shearing said.

The South African rand fell by 0.9 percent to 15.48 per dollar. The Czech koruna declined 0.6 percent to 22.2 per dollar.

Turkey’s central bank hiked its benchmark interest rate to 17 percent from 10.25 percent in November and December to defend the lira, but has left it unchanged since, even as annual inflation accelerated to 15.6 percent from 14.6 percent in December. Interest rates stand at 17 percent, providing scant returns for investors when inflation is subtracted.

Some economists have called on monetary policymakers to raise rates again at a meeting on March 18, to help contain inflation and defend the lira. The central bank says it is committed to meeting a year-end goal of 9.4 percent for consumer price inflation and that annual price increases will start to slow.

The lira had hit a record low of 8.58 per dollar in early November after the central bank kept interest rates at below inflation to help the government engineer a borrowing boom. That lax monetary policy led to a widening in the current account deficit and concerns among investors for economic stability.

Turkish President Recep Tayyip Erdoğan, who replaced the central bank’s governor on Nov. 7 with Naci Ağbal, a former finance minister, is expected to announce a package of reforms this week to help stabilise the economy and attract investment.

The government plans to prioritise the measures in a timetable, Dünya newspaper reported on Monday.

Inflation in Turkey and many other emerging market countries is also expected to come under pressure from a rise in global oil prices. Turkey imports nearly all the energy that it consumes.

The Russian ruble fell by 0.3 percent to 74.55 per dollar on Monday. Russia is a net exporter of oil and natural gas.