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UPDATE 1-EMERGING MARKETS-Turkey's lira surges after unexpected rate hike

* Turkish cenbank says inflation was higher than expected

* MSCI EM currencies index set for worst day since March

* Johannesburg trading shut on Heritage Day

* FTSE Russell’s annual review of govt bonds index in focus (Updates with lira’s reaction to central bank policy decision, adds comments, details on EM bonds)

Sept 24 (Reuters) - Turkey’s lira charged higher against the dollar on Thursday as investors cheered the central bank’s surprise move to raise its policy rate, while emerging market stocks dropped to two-month lows.

After hitting a series of record lows, the lira climbed 1% as the central bank said a fast recovery from the initial coronavirus pandemic shock sent inflation higher than expected, prompting it to hike interest rates by 200 basis points after nearly a year of aggressive rate cuts.

Economists were expecting back-door tightening measures while rates stay on hold.

“Massive surprise, and positive. Suggests the (central bank) listened to the market and decided they had to move to avoid a disorderly devaluation and potential balance of payments crisis,” said Tim Ash at BlueBay Asset Management.

“They are not out of the woods yet, but they have given themselves a fighting chance.”

The lira has lost over 20% versus the dollar this year, making it one of the worst performing currencies due to worries about Turkey’s depleted forex reserves and sharply negative real interest rates.

The lira was also supported by easing tensions over sanctions from the European Union after Ankara agreed to talks with Greece over maritime claims, although a date for discussions had not been decided yet.

Stocks in Istanbul climbed about 1%.

Meanwhile, MSCI’s emerging market index for stocks dropped 1.8% while the currencies headed for the steepest one-day percentage decline since March, on risk aversion due to concerns over the slowing pace of economic recovery and lack of fiscal stimulus.

The Russian rouble hovered near six-month lows. South African financial markets were shut on Thursday for Heritage Day.

Emerging market bonds also came under pressure with the premium investors demanded to hold hard-currency debt over U.S. safe-haven treasuries. The JPMorgan EMBI Global Diversified index hit a two-month high of 441 basis points.

Focus will also be on FTSE Russell’s annual review of its World Government Bond Index on Thursday, where the index provider is widely expected to add Chinese government bonds, potentially opening the way for more foreign participation in China’s $16 trillion bond market.

Malaysia sovereign bonds are also under review while Argentine stocks could be stripped from frontier market status amid capital controls last week.

For GRAPHIC on emerging market FX performance in 2020, see For GRAPHIC on MSCI emerging index performance in 2020, see

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For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see (Reporting by Medha Singh in Bengaluru; Editing by Devika Syamnath and Bernadette Baum)