Turkish lira slips for fourth consecutive day on China worries

ANKARA, Jan 7 (Reuters) - Turkey’s lira slipped to a new three-month low on Thursday, after Beijing guided the yuan lower, prompting concerns about the state of the Chinese economy and triggering an emerging market sell-off.

The lira has been particularly vulnerable to changes in global sentiment since last month when the central bank left interest rates unchanged contrary to expectations of a hike, renewing fears about the rate setter’s independence.

In its fourth consecutive daily decline, the currency weakened as far as 3.0280 against the dollar on Wednesday, its weakest since Oct. 2, before edging back to 3.0168 by 1025 GMT, compared with 3.0069 late on Wednesday.

In a presentation released on Thursday, Governor Erdem Basci said the central bank may start monetary policy simplification steps at its Jan. 19 meeting if there is a lasting decline in market volatility.

Markets fear that Beijing, in a bid to boost exports, is allowing the yuan’s depreciation to accelerate, meaning the world’s second biggest economy is in worse shape than previously thought. The worry is that the effect could be amplified further if other countries follow suit in a bid to compete.

Deniz Cicek, economist at Finansbank said concerns about China and the yuan depreciation in the yuan hit all emerging market currencies badly this week.

“However, having weakened by more than 3 percent over end-2015, lira performance was particularly poor. In fact, the lira has been vulnerable to deterioration in risk appetite and geopolitical tensions because of the central bank’s reluctance to raise interest rates.”

Amid stubbornly high inflation, with consumer prices rising 8.81 percent last year, the bank is under pressure to hike rates, a move vehemently opposed by some of the country’s most influential politicians who want to protect growth.

The central bank actively controls the ‘corridor’ between its lending and borrowing rates by tweaking the volumes of money available at three of its main rates, such that a hike at one end of the corridor need not mean all rates -- and borrowing costs -- rise.

Analysts said the lira was likely to remain volatile.

“If the global conditions remain unfavourable and the central bank remains unresponsive, we may see further currency depreciation going ahead,” Cicek added.

The main BIST 100 share index fell 1.3 percent to 70,274 points, outpacing emerging market peers which fell almost 2.5 percent.

The benchmark 10-year government bond yield stood at 11.2 percent, compared with 11.28 percent at Wednesday’s spot close. (Editing by Daren Butler and Ralph Boulton)