Turkish Lira Weakens as Slowing Inflation Stokes Rate-Cut Bets

  • Lira leads declines among 24 emerging-market currencies
  • September inflation slowed to lowest in more than a year

Turkey’s lira weakened the most in emerging markets and bonds gained as slowing inflation prompted investors to bet policy makers will step up the pace of interest-rate cuts.

The currency weakened 0.5 percent to 3.0135 per dollar as of 3:39 p.m. in Istanbul and the yield on 10-year lira bonds fell 13 basis points, set for the biggest drop in more than a week. Inflation in September declined to 7.69 percent, the lowest in more than a year, held back by falling food prices.

A slowdown in consumer price gains gives the central bank more room to lower its overnight lending rate which it has already cut by 250 basis points since March. The prospect of more easing boosts demand for bonds but reduces the lira’s allure to carry traders, who borrow in a currency with low interest rates and invest in another where they are higher. Since the central bank started easing this year the lira has weakened the most among 24 emerging markets after the Mexican peso.

“Lower-than-expected inflation may have fueled market speculation that the central bank may increase the size of a rate cut from 25 basis points to 50 basis points or perhaps even more as the economy lost more momentum,” Piotr Matys, a currency strategist at Rabobank in London, said by e-mail. He expects the currency will trade between 3.1 and 2.8 against the dollar this year.

After an attempted coup in July, the central bank halved the pace of rate cuts to 25 basis points at each meeting. Gross domestic product expanded 3.1 percent in the second quarter, compared with 4.7 percent in the previous three months. In a statement accompanying its decision in September, the monetary authority highlighted weakness in the Turkish economy.

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