Turkish Lira Falls to Record as Tax Increases Curb Rate Bets

The lira fell to a record and Turkish shares slumped on bets that price and tax increases will curtail growth and stoke inflation, leaving the central bank less likely to raise interest rates.

Turkey’s currency depreciated as much as 1.9 percent to 2.1886 against the dollar, the weakest since Bloomberg started tracking the currency in 1981, before trading at 2.1733 as of 5:31 p.m. in Istanbul. It tumbled 17 percent last year, the second-biggest drop among emerging markets in Europe, the Middle East and Africa, as a corruption probe led three ministers to quit. The benchmark stock index lost 1.2 percent.

The government raised special consumption taxes on some cars, alcoholic drinks, cigarettes and mobile phones, according to a decision published in the official gazette yesterday. The annual salary increase for minimum wage-earners will be 11 percent this year, Labor Minister Faruk Celik said Dec. 31.

“I have my doubts that the central bank will raise interest rates and contract demand further,” Ugur Kucuk, a fixed-income strategist at IS Investment Securities, said in e-mailed comments today. Higher rates “may affect growth badly, as it will come on top of the tax hikes,” he said.

Yields on two-year benchmark bonds climbed as much as 41 basis points before closing 14 basis points higher at 10.24 percent, the highest since January 2012. They rose 3.95 percentage points last year in the biggest increase after Brazil among 20 emerging markets tracked by Bloomberg.

Corruption Probe

The two-year yield has climbed more than a percentage point since the sons of three ministers and the head of state-run Turkiye Halk Bankasi AS were arrested on Dec. 17 amid probes into bribery, money laundering, gold smuggling and corruption in government tenders.

“In our recent emerging markets quarterly publication, we recommended investors stay short duration on cash bonds,” Koon Chow, an emerging-markets strategist at Barclays Plc in London, wrote in e-mailed comments. “Our recommendations stand, particularly as we do not see an end to the lira depreciation pressures in the coming weeks.”

Turkish assets have been falling since mid-2013 as part of a wider rout in emerging markets triggered by Federal Reserve plans to trim its $85 billion monthly bond-buying program, with policy makers agreeing on the first reduction last month. Turkey’s current-account gap probably widened to 7.2 percent of gross domestic product last year from 6.1 percent in 2012, according to the median of 29 forecasts compiled by Bloomberg, leaving it vulnerable to any withdrawal of foreign capital.

U.S. Yields

The yield on 10-year U.S. Treasuries touched 3.05 percent today, the highest in more than two and a half years. Ten-year yields jumped 1.27 percentage points in 2013. They have averaged 3.49 percent in the past decade.

“We will continue to see the weaker current-account stories, including South Africa, Indonesia and Turkey, under pressure as U.S. Treasury yields continue to head north,” Simon Quijano-Evans, head of emerging-markets research at Commerzbank AG in London, said in e-mailed comments today.

The benchmark Borsa Istanbul 100 index retreated to 66,985.82, after losing 13 percent in 2013. Turkiye Garanti Bankasi AS slumped 2.3 percent, while Akbank TAS dropped 2.1 percent. Turkiye Halk Bankasi AS, whose chief executive officer remains under arrest as part of the graft probe, dropped 3.7 percent.

The Turkish central bank sold $100 million today, the lowest it offered since Dec. 19, as part its plan to sell a minimum $3 billion this month to shore up the lira. The bank sold $600 million on each of 2013’s last two days.

Before it's here, it's on the Bloomberg Terminal.