October 31, 2018 / 5:23 PM / 16 days ago

UPDATE 1-Turkey's lira weakens after government tax cut plans

(Adds economist, Albayrak comments, updates lira)

ANKARA, Oct 31 (Reuters) - Turkey’s lira weakened more than two percent against the dollar on Wednesday after the government unexpectedly announced a plan to cut taxes on several sectors, including cars, white goods and furniture, until the end of the year.

The tax cuts, announced by Finance Minister Berat Albayrak, came hours after the central bank sharply raised its inflation forecasts for this year and next, predicting a rate of 23.5 percent by the end of 2018.

The announcement prompted a sell-off in the lira, which had recently started rebounding from a meltdown that saw the currency plunge more than 40 percent this year.

The lira weakened to as far as 5.63 against the dollar, from 5.50 before the announcement, and closed at 5.6050.

“That doesn’t sound like a hugely clever move, and wasn’t something we were expecting,” said Paul Fage, senior emerging market strategist at TD Securities.

“What they are probably trying to do is ... get a bit of a blip down in inflation, but that is a one-off blip and you run the risk of stimulating consumption and of rising pressure on inflation again.”

Piotr Matys, emerging market forex strategist at Rabobank, said it was an “unfortunate timing” for the government to announce the tax cuts, adding that the move could be an attempt to avoid prolonged economic slowdown ahead of next year’s local elections.

Albayrak later defended the tax cut plans, saying they were aimed at supporting economic rebalancing, employment and the fight against inflation.

Shares in Turkey’s white goods maker Arcelik rose 5 percent after the announcement, while car makers Ford Otosan and Tofas were both up 7 percent.

“At best these measure could be short term, but they are not tackling long term issues,” TD Securities’ Fage said. (Reporting by Ece Toksabay Additional reporting by Ezgi Erkoyun and Ali Kucukgocmen in Istanbul, Karin Strohecker in London Writing by Tuvan Gumrukcu Editing by Peter Graff)

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