Turkish Bonds, Lira Fall as Investors Factor In Basci Inaction

Turkish bonds fell to a three-month low and the lira weakened for a third day as global economic concerns spurred losses across emerging markets and investors speculated the nation’s central bank won’t act in time to arrest deepening inflation.

Policy makers, who reduced the benchmark interest rate in February amid political pressure and have refrained from any further cuts since then, will meet Jan. 19 even as consumer prices remain above their target for the fifth successive year. The central bank will maintain “tight” monetary policy until there is a marked improvement in the inflation outlook, according to a presentation by Governor Erdem Basci on Monday.

The central bank’s failure to raise borrowing costs and streamline the policy-rate system at its December meeting has turned some investors skeptical about any immediate action. Turkey’s inflation accelerated for a second month in December to 8.8 percent, the highest level in more than a year.

“The higher-than-expected inflation reading in Turkey and central bank’s policy misstep last year exacerbated the selloff,” said Roxana Hulea, a London-based emerging market strategist at Societe Generale SA. “With liquidity coming back after the holidays, the market is only now getting a chance to fully reflect the repricing of inflation risk and likelihood of policy error in Turkey.”

The yield on the government’s two-year bonds climbed 16 basis points to 11.19 percent, the highest since Oct. 2 on a closing basis. The lira weakened 0.4 percent to 2.9762 per dollar at 6:03 p.m. in Istanbul. Stocks declined around the developing world after China’s efforts to prop up its stock market failed to quell investor misgivings over the strength of the global economy.

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