(Adds quotes on central bank; background on Fed, ECB)
By Nevzat Devranoglu
ANKARA, Sept 4 (Reuters) - Turkey’s lira firmed more than 1% on Wednesday, outperforming other emerging currencies after annual inflation fell more than expected in August and on expectations of easing from the U.S Federal Reserve and European Central Bank (ECB).
On Tuesday, data showed inflation fell to 15.01% in August, resuming its downward trend, giving the lira another boost after figures on Monday showed the economy shrank less than expected in the last quarter.
On Wednesday, the lira firmed to 5.6645 against the U.S. dollar, marking the first time it strengthened beyond 5.70 to the dollar since August 20. It has gained about 2% since the inflation data was published.
Economists say the inflation figures pave the way for another interest rate cut next week, after the central bank sharply cut its key rate by 425 basis points to 19.75% in July.
“The scale of the cut will be determined by the global risk appetite at that time. Looking at the central bank’s previous statements, there could be a 200-250 basis point cut at next week’s meeting,” said Serkan Gonencler, an economist at Seker Yatirim.
Another hefty rate cut, however, could leave the currency vulnerable to shocks stemming from global developments, said a chief forex trader at a bank, adding that global risk appetite would play an important role in the potential rate cut.
“What we saw in the markets yesterday is a shift to positive pricing due to next week’s central bank interest rate decision being backed by data,” the trader said.
“The risk here is whether the central bank will opt for a rate cut nearly as strong as its previous, one that we can say was a front loaded monetary easing,” the trader added. “We can say markets view a rate cut of more than 200 basis points as certain.”
Reuters reported on Tuesday that ECB policymakers are leaning towards a stimulus package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates.
The Fed this year shifted to an easing stance, boosting emerging market currencies like the lira, and it could cut rates again in two weeks.
Additional reporting by Tuvan Gumrukcu; Editing by Dominic Evans and Jonathan Spicer