Turkish Investors Get Reality Check After Inflation Accelerates

(Bloomberg) -- The renewed stress in Turkish markets shows investors see policy makers as still behind the curve.

Just one week after the central bank led by Murat Cetinkaya tightened policy to backstop an ailing currency, the lira has slumped to a fresh record low. Data on Thursday showed inflation accelerated more than forecast, leading to concerns that monetary policy remains too loose to deal with an overheating economy.

The central bank has raised borrowing costs by more than 500 basis points since the beginning of 2017, but looser fiscal policy and a government-backed credit binge before snap elections in June have outweighed much of that tightening. That is leaving lira assets buckling under the pressure of runaway inflation.

“These nasty figures confirm they should have done more,” said Guillaume Tresca, a strategist at Credit Agricole SA, who says the lira stands to depreciate further and sees the government bond curve bear-flattening. “The central bank is clearly behind the curve.”

Consumer prices rose 10.85 percent in April, compared with the median forecast of 10.45 percent in a Bloomberg survey, and inflation is now running at more than double the central bank's official target. The country's current-account deficit, one of the largest as a percentage of output among peers, is ballooning.

S&P Global Ratings downgraded the nation's debt grade on Tuesday, saying that the economy is overheating and risks a hard landing. On Monday, Prime Minister Binali Yildirim announced at least 24 billion liras ($5.8 billion) of extra spending this year, adding to concerns that policy makers are doubling down on efforts to underpin growth at the expense of financial stability.

The lira traded 0.5 percent lower at 4.1959 per dollar as of 3:30 p.m. in Istanbul after sinking to a record 4.2296 earlier. The yield on Turkey's 10-year local-currency bonds jumped 36 basis points to 13.29 percent, surging for a second day, as it approached a record high of 13.56 percent hit last month.

The data today shows “the inability of the central bank to get ahead of the curve,” said Lorenzo Gallenga, a money manager at Quaestio Capital Management in Milan, who has no exposure to local-currency debt. “The risk is now of inflation expectations moving higher, making tackling persistently high inflation that much harder.”

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Neil Chatterjee

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