Turkish Assets Tumble as Inflation Puts Policy in the Spotlight

(Bloomberg) -- The Turkish lira fell and government bonds dropped amid concern that the country’s authorities were not doing enough to tackle runaway prices.

The currency slumped almost 2 percent against the dollar and the yield on 10-year government bonds jumped more than 100 basis points after inflation accelerated to 24.5 percent in September. That exceeded even the highest forecast in a Bloomberg analyst survey and drove the real policy rate back below zero.

Turkish Assets Tumble as Inflation Puts Policy in the Spotlight

While the lira has shown signs of stabilizing after the central bank raised interest rates to 24 percent last month, helping government bonds rally, many analysts and investors criticized policy makers for waiting too long to act. The knock-on effects of a more than 35 percent depreciation in the lira this year are still feeding through into higher consumer prices, fueling calls for even higher borrowing costs.

Wednesday’s inflation reading “underlines the extent of the policy screw up earlier in the year,” said Timothy Ash, a strategist at BlueBay Asset Management in London.

Ash said investors may stay cautious until further signs of a thaw in a Turkey-U.S. diplomatic spat weighing on sentiment, with attention on the next hearing of jailed American pastor Andrew Brunson on Oct. 12. “If there is no good news then, then the pressure on the central bank will be extreme again on the rates front,” he said. Policy makers next meet on Oct. 25.

After touching a low of 6.0969 per dollar, the lira pared its decline and was down 1.2 percent at 6.0582 as of 3:49 p.m. in Istanbul. The yield on Turkey’s 10-year government bonds was 112 basis points higher at 19.42 percent.

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