EM stocks extended their losses to fifth session in a row.
Nov 23, Reuters - Turkey's lira sank by 15% to 13.45 per dollar on Tuesday after President Tayyip Erdogan defended interest rate cuts despite rising inflation.
The central bank was forced to cut again this month because of its insistence on lower rates, making it 400 basis points of cuts this year to 15%, with signs of more to come. The inflation in Turkey is at 20% and is expected to increase further.
Erdogan said on Monday higher rates would not lower inflation and vowed to win the economic war of independence. Market experts and former central bank members have called for tighter controls to stem the lira's plunge.
Erdogan has sacked hawkish central bankers in his quest for stimulus.
The lira, which was at 9.6 a dollar at the beginning of the month, has fallen 11% this week, making its annual losses to 42%, a far cry from a 0.2% rise in MSCI's index of EM currencies this year. The last time the lira traded was down 9.5 and 12.5%.
After years of erratic policy, investors have reduced exposure, which has limited contagion fears from Turkey, according to analysts.
The way this would get uglier for the rest of the world is if President Erdogan could hold his nerve for long enough and the lira fall far enough to endanger Turkey's banks, said Simon MacAdam, senior global economist at Capital Economics.
This could cause risk appetite to fall in other EMs and cause central banks to tighten monetary conditions. Turkey's banks have held up well so far, up 19% this month. The broader stock index has gone up 17% in November after hitting record highs.
The currencies of Russia, Ukraine, Belarus, Poland and Israel fell with war rumblings on the currency.
The rising policy rate in emerging markets could affect EM stocks, according to BlackRock on Monday.
MSCI's index of EM stocks extended losses to a fifth straight session, down 0.7%.
The possibility of U.S. Federal Reserve tapering sooner than expected under another term for chair Jerome Powell and rising COVID 19 cases forcing movement curbs in Europe have also weighed on risk assets.
Chile's peso outperformed in Latin America, extending gains despite falling copper prices. It jumped 2% on Monday on presidential election cheer after far-right Jose Antonio Kast won the first round vote.
Brazil's real led declines in the region, down 1%, while Mexico's peso fell 0.5%, shrugging off a reduction in forecast for Brazil's primary deficit and a rise in month-on-month retail sales in Mexico.