Turkish Bonds Extend Drop as Traders Await Central Bank Decision

  • Yield on 10-year debt climbs above 15 percent; lira weakens
  • JPMorgan says central bank may hike rates by 50bps on Thursday

Turkish government bonds fell for the fifth day and the lira weakened against the dollar as investors waited to see how the central bank will set policy this week in response to a deteriorating inflation outlook.

The pace of consumer-price increases climbed toward a 14-year high in May as an almost 18 percent slide in local currency this year feeds through to import prices. That’s fueling speculation that the monetary authority will have to raise interest rates for the second time in as many months when policy makers meet on Thursday.

Officials led by Governor Murat Cetinkaya were forced into a 300-basis-point emergency rate increase in May to stem a market rout, and are said to be prepared to deliver more if inflation quickens. While last month’s move helped the lira losses, the street remains split over future policy action. Six of 11 analysts surveyed by Bloomberg expect the central bank to hold its main rate unchanged at 16.50 percent while five see a hike of 50 basis points or more.

“May price data and ongoing credibility problems call for further tightening, in our view,” Yarkin Cebeci, an economist in London at JPMorgan Chase & Co., wrote in a note to clients. He is penciling in 100 basis points of policy tightening by July, and says he won’t be surprised if the bank delivers half of that at this week’s meeting.

JPMorgan revised up its 2018 inflation forecast for Turkey to 11.8 percent from 10.8 percent previously, and expects the pace of price increases to peak at 13.8 percent in July. Consumer-price growth accelerated to 12.2 percent in May, nearing a high of 13 percent reached in November.

The yield on 10-year government bonds jumped 19 basis points to 15.04 percent, approaching a record high of 15.30 reached on May 23. The lira slipped as much as 0.8 percent to 4.6268 per dollar.

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