(Bloomberg) -- Turkey’s lira and bonds dropped, snapping a recent rally fueled by bets for an imminent interest-rate increase, as MSCI Emerging Markets Currency Index declined the most in almost a week.

The currency fell for the first time in four days versus the dollar as data showed gross domestic product expanded at an annual pace of 5.2 percent in the second quarter, slowing from a revised 7.3 percent in the previous three months. The lira has lost around 40 percent of its value this year.

With policy makers expected to extend a tightening cycle when they meet Thursday, the outlook for the economy is grim. The monetary authority has already boosted funding costs by 650 basis points since April but is coming under pressure to do more to contain a market rout. Breakneck growth earlier this year widened the nation’s twin deficits and left local assets exposed to a stronger dollar and fragile investor sentiment.

“All indications are that growth momentum has begun to grind to a halt since July-August after the lira crisis took on a whole different level,” Commerzbank AG analysts including Tatha Ghose wrote in a research note before the GDP report. “This prospect can only change if a comprehensive policy breakthrough magically emerges and manages to stabilize the lira.”

A moderate slowdown in consumption and investment growth along with a strong recovery in export and tourism income point to a balancing of the economy, Treasury and Finance Minister Berat Albayrak said in emailed statement.

The central bank will raise its one-week repo rate by another 300 basis points this week, according to the median estimate in a Bloomberg survey. It signaled last week that higher rates were in the offing after inflation accelerated to a 15-year high of almost 18 percent.

The lira slid by as much as 1.4 percent to 6.4969 per dollar, before paring the decline to 0.4 percent as of 12:03 p.m. in Istanbul as the greenback reversed some if its broad gains. The MSCI EM Currency Index declined 0.3 percent.

The yield on Turkey’s 10-year government bonds jumped 20 basis points to 19.75 percent, after plunging by 221 basis points last week.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

©2018 Bloomberg L.P.

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