Economic news

EM-Lira Drops 3% after Rate Cut; S.African Cenbank Eyed

* Turkey cuts key rate by 100 bps to 15%

* SARB decision at 1300 GMT 

Nov 18 (Reuters) - Turkey’s lira slid more than 3% after the central bank cut the benchmark policy rate by 100 basis points as expected and signalled the possibility of another cut in December.

The central bank cut the rate to 15% as President Tayyip Erdogan, who has replaced hawkish central bank governors in the past, ratcheted up pressure to provide more stimulus for economic growth.

The lira fell 1.9% to 10.8 to the dollar after the decision. After plunging to a record low of 10.98 earlier in the session, a rally just before the decision had seen it firm up to 10.2. This helped the currency from breaching 11 after the cut.

But the lira will breach 11 and there is no reason for it to stop there as this is a “recipe for disaster” said Cristian Maggio, head of portfolio strategy at TD Securities.

“The fact that they are suggesting another cut is insane from a macroeconomic and monetary policy point of view when inflation is at 20% and will only go higher,” he said, adding that when the impact of sharp currency depreciation gets transmitted to the real economy through importers, the central bank will be forced to hike.

Volatility gauges for the lira hit April highs, while the cost to insure against default hit highest since the beginning of the month. Turkey 2030 dollar bond declined nearly 1 cent.

Focus now is on the South African Reserve Bank (SARB) which is expected to hold rates at 3.5% in a decision due shortly. But it is seen as too close to call. The rand erased early gains to slip 0.2%, staying at 10-month lows.

While most emerging market central banks in Asia have held rates to spur growth, peers elsewhere, with some exceptions like South Africa and Turkey, have turned aggressively hawkish to stave off inflation.

China’s central bank governor Yi Gang said on Thursday that global inflation has increased sharply and “whether this inflation pressure is transitory still remains under debate.”

After data on Wednesday showed Russian inflation continued to gather pace and economic growth slowed, the central bank said it may be approaching the threshold where it would consider a moderately tight monetary policy. The bank is seen hiking rate by 50 basis points to 8% next month.

Russia’s rouble was flat, with falling oil prices weighing.

Currencies in Hungary and Poland outperformed most regional peers, up about 0.2% against the euro. A Polish rate setter said the probability of an interest rate rise in December was “quite high”.

Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu and Shinjini Ganguli

Source: Reuters

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