EMERGING MARKETS-Lira at new record lows on rate hike uncertainty

LONDON Mon Jan 20, 2014 6:33am EST

LONDON Jan 20 (Reuters) - Turkey's lira fell to a record low on Monday and the cost of insuring its debt hit 18-month highs, adding to pressure on the central bank to deliver a substantial interest rate rise to offset political turmoil and inflation.

Other emerging market assets also slipped as a rise in Chinese money market rates raised fears economic growth may cool more than expected in the world's No. 2 economy.

Turkish assets extended their sell-off, with the lira losing 0.4 percent against the dollar and options markets indicating more weakness ahead.

One-month volatility, a gauge of expected swings in the currency, rose to two-week highs.

One-month risk reversals, which measure the relative demand for options on a currency rising or falling against the dollar, showed the strongest bias for lira weakness in two weeks . Default insurance costs in the five-year CDS market rose to 18-month highs, Markit data showed.

Analysts say the central bank must raise rates at its Tuesday meeting to support the lira, which has fallen more than 12 percent in the past three months despite billions of dollars in currency interventions.

But a poll conducted last week showed most analysts expect no change in policy, and the country's economy minister said the central bank should not raise rates.

"If there were no action by the central bank tomorrow, markets would react correspondingly. We do think the central bank will do something, either raise rates or take other form of action in order to calm down the market," said Simon Quijano-Evans, head of EM research at Commerzbank in London.

The stakes are high, given that 2013 inflation at 7.4 percent busted central bank forecasts. More worryingly, the past three months have seen inflation expectations for the coming year rise 30 basis points, analysts at Unicredit point out.

They also noted that the central bank had expended $18 billion via interventions since the second quarter of 2013, or almost half its usable reserves, making tighter monetary policy the only option for policymakers.

Other emerging currencies also weakened against the firmer dollar, while MSCI's emerging equity index eased to 10-day lows after losses on mainland Chinese shares.

Shanghai shares ended down 0.7 percent for its lowest close since last July, and the CSI300 index of the leading Shanghai and Shenzhen A-shares shed 0.6 percent.

Markets are jittery about the rise in benchmark seven-day repo rates, which jumped 145 basis points to 6.6 percent, stoking fears of a repeat of China's cash crunch at the end of last June.

Data showed China's economy grew 7.7 percent in 2013 after easing in the final three months on sagging investment growth, a cooling that some analysts say is a sign of more sober times ahead

In emerging Europe, the Hungarian forint fell to a one-month low against the euro, ahead of this week's central bank meeting that is seen likely to cut interest rates further after data this month showed inflation at a 43-year low.

In Ukraine, credit default swaps rose 24 basis points after mass protests rocked Kiev again at the weekend, and one-month non-deliverable forwards traded higher at 8.43 though the spot rate held steady at 8.37 per dollar.

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see )

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