Turkey’s lira, this year’s worst- performing currency, may tumble as the record current-account deficit and rising inflation undermine the central bank’s week- long attempt to stem the decline, options prices show. The lira sank to a two-year-low of 1.73 on July 25. Central bank chief Erdem Basci, who had encouraged a weaker lira to reduce the current account, resisted further depreciation by suspending dollar-purchase auctions and returning $590 million to banks through reduced reserve requirements. The lira fell as much as 0.8 percent to 1.7236 per dollar, before trading down less than 0.1 percent at 1.7103 as of 10:40 a.m. in Istanbul, taking this year’s decline to 9.8 percent. There’s an 86 percent chance that the lira will hit 1.75 per dollar by year-end, according to implied probability calculated from currency options contracts. “Investors will probably try to take the lira back to previous lows beyond 1.72 per dollar,” Luis Costa, emerging- markets strategist at Citigroup Inc. in London, said in a phone interview. “The central bank will definitely be tempted to intervene verbally or de-facto again. The question is: What is the central bank’s pain threshold?” The lira pared losses today after inflation accelerated less than economists estimated and the central bank said it planned to hold an unscheduled meeting of its rates-setting committee tomorrow. The inflation rate rose to 6.3 percent in July from 6.2 percent a month earlier, the statistics office in Ankara said today. Prices were expected to rise 6.7 percent, according to the median of seven estimates in a Bloomberg survey. Not ‘Overvalued’ Basci said last week the lira wasn’t “overvalued” and that he had the tools to slow its decline. The central bank had about $92 billion of foreign-currency reserves, according to Bloomberg data. Traders are paying a premium of 3.4 percentage points more for one-month contracts granting the right to sell the lira than to buy the currency, compared with 2.3 percentage points a month ago, according to so-called risk-reversal rates compiled by Bloomberg. The lira is the world’s worst-performing currency this year among 31 major currencies tracked by Bloomberg. The central bank has held interest rates at an all-time low to make the currency less attractive to speculators in an effort to reduce the current account deficit. The trade gap expanded to a record $10.2 billion in June, contributing to a current-account deficit that the International Monetary Fund projects will reach 10.5 percent of gross domestic product this year. Basci said July 28 that the current-account gap will narrow by the end of the year. Rate Outlook There’s little chance the central bank will lift the benchmark one-week repo rate from 6.25 percent this year because of a risk that European debt problems will continue to depress global growth, Basci said. “It’s going to be a bumpy ride though, and if the central bank fails, it will definitely be some very ugly uncharted territory,” Henza Tukel, a currency trader at Turk Ekonomi Bankasi AS, said in e-mailed responses to questions. “Last week’s spike certainly made us question the ‘orderly manner’ of the currency’s depreciation.” To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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