October 4, 2018 / 1:05 PM / in 13 days

UPDATE 1-Turkey's lira weakens after September inflation, dollar rally

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ISTANBUL, Oct 4 (Reuters) - Turkey’s lira weakened more than one percent on Thursday, a day after data showed that annual inflation had hit nearly 25 percent in September, vastly exceeding expectations, and as the dollar held at a six-week high.

Inflation surged to nearly 25 percent in September from a year earlier, data showed on Wednesday, hitting its highest 15 years and sharpening focus on whether the central bank will be able to deliver another hefty rate hike. Producer prices - a leading indicator of price changes in the economy - soared by a staggering 46 percent.

Turkey’s lira has lost around 40 percent of its value this year on concerns about the central bank’s ability to rein in double-digit inflation with President Tayyip Erdogan calling for lower interest rates to ease borrowing.

“Inflation was really a disappointment on all fronts. Real rates are now slightly negative, so the massive September rate hike has been completely offset,” said Guillaume Tresca, senior emerging market strategist at Credit Agricole.

He also said that the rise in producer prices will also be reflected in consumer prices in the coming months and added that he expected the central bank to remain behind the curve.

The lira weakened to 6.1475 by 1300 GMT, compared to Wednesday’s close of 6.0500. It hit 6.23 earlier in the day.

The higher-than-expected inflation levels mean that, once again, inflation is above the central bank’s policy rate, now at 24 percent. The bank’s next policy-setting meeting is on October 25.

The central bank had hiked rates by 6.25 percentage points last month. Following the hike, President Tayyip Erdogan said that his patience with high interest rates had its limits.

Erdogan, a self-described “enemy of interest rates”, wants borrowing costs lowered to keep the economy growing. His repeated criticism of interest rates and monetary policy has undermined confidence in the central bank and sparked the lira sell-off. (Reporting by Behiye Selin Taner and Ali Kucukgocmen; Editing by David Dolan)

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