Turkish lira weakens on concerns of looser monetary policy

ISTANBUL: Turkey's lira weakened some three percent on Tuesday amid increased expectations of an early loosening in monetary policy  after data showed the country's annual inflation rate eased in November from a 15-year peak.

The lira fell sharply earlier this year due to investors' concerns over the central bank's ability to respond adequately  to high inflation as it faces pressure from President Tayyip Erdogan to lower borrowing costs.

Those concerns were partially assuaged by a massive 6.25 percentage point rate hike in September that helped the lira to reverse some losses. The currency had fallen by as much as 47 percent against the dollar in the year to August.

Efforts to mend strained diplomatic relations with the United States have also supported the lira.

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

The fall in inflation has triggered speculation that the central bank will cut rates earlier than anticipated, said Piotr Matys, an emerging market forex strategist at Rabobank.

"If they indicate that they may start lowering interest rates in Q1, the lira may extend its losses," he said, when asked about his expectations for the central bank's rate-setting meeting next week. He added that the lira could stabilise if the central bank reassures markets that it will keep policy tight.

The monetary policy committee will announce its rate decision on Dec. 13 at 1100 GMT.

The lira weakened to 5.4140 against the dollar by 1513 GMT from Monday's close of 5.25. It reached 5.46 earlier in the day, its lowest point in around two and a half weeks.

OIL PRICES

The rally in oil prices also impacted the lira, as investors anticipate production cuts by OPEC and a reduction in Canadian supply. Higher costs for Turkey's energy imports would revive inflationary pressures.

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.