Turkey's lira slips as expectations grow for rate hike, sanctions

ANKARA: The Turkish lira slid as much as 0.8% on Monday as bankers raised expectations of another rate hike this month to tackle rising inflation, while possible sanctions from the European Union and United States also weighed.

The lira dipped as far as 7.87 versus the dollar from Friday's close of 7.8075, but trimmed its losses to trade at 7.8370 by 0845 GMT.

As the sanctions concerns simmered, Germany's foreign minister said the EU will discuss "consequences" this week for Turkey's provocations in the Eastern Mediterranean.

The currency has lost 24% this year on worries over depleted FX reserves and negative real interest rates. But it has rebounded from a record low of 8.58 a month ago after a leadership overhaul including a new central bank chief.

While the new-look bank hiked rates by 475 points to 15% last month, supporting the lira, more tightening could come after data last week showed annual inflation jumped to 14% in November. The bank targets 3%-7% inflation.

"Our current expectation is that the Turkish central bank will raise interest rates by another 100-150 basis points at the end of the month," said a treasury desk trader at one bank.

The central bank's next policy meeting under Governor Naci Agbal is on Dec. 24. Last month the bank said it would decisively move to permanently lower inflation expectations.

The trader, who requested anonymity, said local investors should cool purchases of foreign currencies now that 1-3 month lira deposit rates have risen to 15.5%, while credit growth rates have dipped below 10% from around 50% in the summer.

"These developments show the lira will gain stability," he added.

Sanctions could harm a Turkish economy already struggling with a coronavirus-induced slowdown, double-digit inflation and badly depleted foreign reserves.

EU foreign ministers will evaluate grounds for sanctions against Turkey over a Mediterranean gas dispute on Monday before the bloc's leaders decide on Thursday whether to make good on their threat to impose punitive measures.

In Washington, Democratic President-elect Joe Biden is expected to be tougher on Turkey than Trump, who had warm ties with President Tayyip Erdogan despite growing hostility among US lawmakers towards Turkey's more aggressive foreign policy.

On Friday, the lira slipped after US lawmakers included mandatory Turkish sanctions in a defence spending bill that moves Washington a step closer to punishing its NATO ally for buying Russian S-400 missile defences.

Separately, the Turkish Treasury was set to hold two bond auctions on Monday, tapping 2-year and 5-year fixed coupon bond issues.