Turkish lira weakens on concerns of looser monetary policy

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ISTANBUL (Reuters) – Turkey‘s lira weakened nearly one percent on Tuesday, as expectations of an early loosening in monetary policy rose after data showed Turkey’s annual inflation rate fell from a 15-year peak in November.

Investors’ concerns over the central bank’s ability to adequately respond to the rise in inflation as it faces pressure from President Tayyip Erdogan to lower borrowing costs sparked a sell-off in the lira earlier this year.

Some of those concerns were partially soothed after a massive 6.25 percentage point rate hike in September, helping the lira, which was down as much as 47 percent against the dollar in the year to August, regain some of those losses.

Official data showed on Monday that annual inflation eased in November from a 15-year peak to 21.62 percent, on the back of tax cuts, discounted products and a stronger lira.

The decline in inflation, along with a slowing economy and a stronger lira, has raised investor concerns that the central bank will lower rates next week.

“Lira has struggled post the good inflation numbers – and I do sense its around concern that the CBRT will take this as the green light to ease prematurely,” said Timothy Ash, a strategist at Blue Bay Asset Management.

The lira <TRYTOM=D3> weakened to 5.29 against the dollar by 1122 GMT, from Monday’s close of 5.25. It declined as much as 5.33 earlier in the day, its lowest point in around one and a half weeks.

The currency crisis has also raised worries about a build-up of bad loans in the banking sector and its impact on the real economy.

Ratings agency S&P Global said on Monday that it expects the amount of bad loans on Turkish banks’ books to nearly double over the next 12-18 months to 6 percent from 3.5 percent in September.

It also said it expected their total credit losses to rise to as much as 2.5 percent from the recent average of 1.4 percent.

Turkey’s economy is expected to go into recession, shrinking 1.4 percent in the fourth quarter of 2018 and another 2.1 percent over the following three months, a Reuters poll showed in October.

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