By Susan Mathew and Ankika Biswas
Sept 1 (Reuters) - Emerging market currencies slumped towards two-year lows on Thursday, as recession worries heightened with the European Central Bank and the U.S. Federal Reserve expected to aggressively tighten monetary policy this month.
Weak PMIs out of Asia and Europe reinforced worries about an economic slowdown, while major central banks' continued focus on inflation control further deepened worries that they might stay tolerant of a some amount of weakness in growth.
The ECB and the Fed are seen hiking by 75 basis points this month, in what would be the Fed's third increase of that size this year.
The Chinese yuan stayed close to two-year lows, while a record trade deficit in South Korea saw the won slump 0.9% to its lowest over a decade. South Africa's rand hit six-week lows, while Turkey's lira fell up to 0.7% before recovering.
"It's a challenging environment for emerging markets," said Jakob Christensen, chief analyst, head of EM research at Danske Bank.
"The PMIs this morning enforcing this signal that the global manufacturing sector is going down, and the Federal Reserve really reinforcing its inflation fighting narrative at the Jackson Hole last Friday, which has really spooked equity markets and global risk sentiment."
Stocks sold-off too, with the MSCI's index of EM shares slipping 1.7% to its lowest in over a month. Asian shares were set for their worst session in nearly eight weeks with South Korea's KOPSI dropping 2.3%.
South Africa and Turkish shares lost more than 1% while Polish shares gave up almost 2%.
In Turkey, where inflation is already at 80%, the government raised electricity and gas prices. The hikes are expected to push Turkey's inflation up by 0.8 percentage points, according to a Reuters calculation.
With the government demanding a focus on economic growth, Christensen said the price hike may see the central bank keeping the key interest rate unchanged at the next meeting, after having cut it by 100 basis points to 13% this month.
IMF RELIEF
Sri Lanka on Thursday reached a preliminary agreement with the International Monetary Fund (IMF) for a loan of about $2.9 billion, while Zambia won IMF approval for a $1.3 billion, 38-month loan programme.
Sri Lankan shares jumped 2%, and the July 2026 dollar bond ticked up, as did Zambia's July 2027 issue.
"A challenging issue is of course that debt sustainability is questioned and in many of these places, China has provided a good chunk of loans that is complicating the possible debt restructuring," Christensen said.