Turkey's lira falls to record low ahead of interest rate decision

The Turkish lira hits a new low, among the worst EM performers this week.

Oct 22 Reuters - Most emerging market stocks and currencies rose on Friday after a report said that debt-ridden developer China Evergrande Group had made some headway in interest payments, while Russia's rouble rose ahead of an interest rate decision.

However, most EM assets were also set for mild weekly gains amid growing expectations that central banks would act to stave off rising inflation.

Shares of China Evergrande rose 4.7%, with dollar-denominated bonds of property developers rallying after Reuters reported that the embattled real estate firm had supplied funds to pay interest on a U.S. dollar bond.

The news helped clear some fears of an imminent default in China's massive property sector, which investors fear could spill over to debt markets across the globe. Analysts speculated whether the bond payment was simply delaying an inevitable default.

The Chinese yuan gained slightly on the news.

The Russian rouble rose 0.2% to around three-month highs against the dollar, as markets expected the central bank to raise rates from 6.75%.

Rising inflation is expected to force the bank's hand, although analysts were split over a 25 basis point bp or 50 bp hike, given that the bank has already raised rates sharply this year.

Even though consumer price index inflation is running above the central bank's forecast for this year, it does not necessarily jeopardize the achievement of its 4.0% target next year, Credit Suisse analysts wrote in a note.

We think the central bank will likely hike the policy rate by 25 bps, although the decision will be a close call. The Turkish lira slumped more than 1% to a record low of 9.6581 to the dollar and was among the worst performing EM currencies this week after the central bank cut rates by twice as much as expected on Thursday.

Sentiment over Turkey was further hit by an international watchdog downgrading the country to a grey list for failing to tackle money laundering and terrorist financing.

Under pressure from President Tayyip Erdogan to ease policy despite high inflation, the bank lowered its repo rate to 16%, bringing the cuts in the last month to 300 basis points in moves which have driven a sustained decline in the Turkish currency's value.

Most central European currencies retreated to the Euro. Poland's zloty fell 0.2% as central banker Rafal Sura said interest rates should rise to pre-pandemic levels, but declined to say when he would vote for a further hike.