By Sujata Rao and Carolyn Cohn
LONDON Jan 29 The boost to Turkey's lira from a
round of huge interest rate hikes quickly faded on Wednesday,
while the rand fell as the market focus switched to monetary
policy decisions due later in the day in South Africa and from
the U.S. Federal Reserve.
Turkish debt insurance costs fell and the country's recent
dollar bond rallied after the central bank jacked up all of its
interest rates late on Tuesday, in a move investors saw as long
The biggest immediate impact of the move was on the lira,
which initially rose more than 3 percent but later eased
off session highs to stand at 2.22 as of 1050 GMT, still up
nearly 1 percent on the day.
"The Turkish rate move was more aggressive than many people
had expected. That was the good part of the story," said Ulrich
Leuchtmann, head of currency research at Commerzbank in
"But the market had to force this activity. There is still a
fear in the market that the central bank does not have a
Turkey's central bank move follows a massive lira sell-off
caused by the prospect of a reduction in U.S. stimulus that has
sucked investor cash out of the most vulnerable emerging
economies. Investors deem real interest rates in these markets
too low to compensate for growing economic and political risks.
Turkish Finance Minister Mehmet Simsek addressed one of
those concerns on Wednesday, saying that economic growth will
not be severely damaged by the rate hikes and that it is too
early to adjust the government's forecast of 4 percent growth
The rate rise follows similar moves across the developing
world, with India unexpectedly raising rates this week and
Brazil and Indonesia already in policy-tightening mode.
But Malaysia's central bank left rates unchanged on
Wednesday, taking the ringgit to the day's lows. And with
the U.S. Federal Reserve expected to announce plans later on
Wednesday to shave another $10 billion off its monthly bond
buying, emerging markets remained fragile.
South Africa's rand gave up early gains to drop 1.7
percent towards recent five-year lows, while currencies such as
Hungary's forint also suffered, dropping 1 percent.
Analysts expect South Africa's central bank to keep its
interest rates unchanged at 1300 GMT.
Swap markets, however, are pricing in a roughly quarter
point rate hike, and banks say 100 basis points in policy
tightening is factored in for the next six months
South African bond markets have seen heavy outflows in
recent sessions, with the benchmark yield having risen
30 bps since the start of this week.
"Although the (central bank) will be very reluctant to hike
rates in such a weak growth environment, failure to do so risks
South Africa getting left in the wake of other emerging markets
that have been hiking aggressively," analysts at Tradition said
in a note.
Others, however, point to South Africa's weak domestic
demand and lower inflation compared to Turkey or India and
reckon an interest rate rise is unlikely.
"The slowdown in Chinese demand and the fall in mining
output because of strikes have been at the root of export
weakness and the current account deficit. I am not sure (a rate
hike) will solve South Africa's external problems," said Claire
Dissaux, head of economics and strategy at Millennium Global.
On equities, the main emerging index rose nearly 1
percent off 4-1/2 month lows, but Turkish stocks reversed early
gains to drop 1 percent.
Ukraine's debt insurance costs fell, according to Markit,
after the country's prime minister resigned on Tuesday, although
Standard & Poor's downgraded the country to CCC+ with a negative
outlook, citing rising political instability.
The move comes a month after the agency raised Ukraine's
outlook, following Kiev's $15 billion bail-out by Russia.
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see )