* Turkish Feb inflation at 15.61%, above estimates

* Lira back in the black for the year

* Russian rouble up for third straight day

* Russia pledges retaliation against U.S. sanctions

* Polish cenbank interest rate decision eyed

By Susan Mathew

March 3 (Reuters) – Turkey’s lira rose on Wednesday as surging inflation called for monetary policy to remain tight, while an index of emerging market currencies looked set for its best day in two months on stabilising bond yields and hopes of an economic rebound.

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The lira firmed 0.4%, with gains so far this week putting it back in the black for the year. The currency, one of the best performing EM currencies this year thanks to a series of rate hikes since last November, had slipped into the red last week when a global bond rout pressured risk assets.

Data on Wednesday showed inflation in Turkey came in at 15.61% for February, above estimates and touching the highest level since mid-2019, keeping up pressure to maintain some of the tightest monetary policy globally.

Inflation data has become crucial because it is not peaking out as the central bank had hoped for, following strong monetary tightening last quarter, said Commerzbank FX analyst Tatha Ghose.

The central bank kept rates steady for the last two meetings after 675 basis points of hikes since last November.

“The central bank desperately needs some favourable CPI prints so that Turkey’s President Tayyip Erdogan does not lose patience or start blaming high interest rates themselves for the high inflation,” Ghose said.

As U.S. Treasury yields weakened and dulled the dollar, emerging market currencies broadly rose with MSCI’s index of developing world units up 0.2%, while its stocks counterpart racked up 1.6%. Optimism around COVID-19 vaccine rollouts and a stimulus package in the Unites States helping global economic recovery also buoyed sentiment.

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Data, however, pointed to a patchy recovery for emerging market business sectors. China’s services sector activity grew at its slowest pace in 10 months in February, while Russia and South Africa’s services sector growth softened.

South Africa’s rand erased early losses to trade up 0.4%, while higher oil prices saw Russia’s rouble extend gains to a third session.

The rouble also got a lift from limited U.S. sanctions announced on Tuesday, that did not target strategic assets. The Biden administration imposed sanctions against Moscow over its alleged attempt to poison opposition politician Alexei Navalny with a nerve agent.

But with Russia pledging retaliation against the sanctions, market implications from possible geo-political strains will be eyed.

In central Europe, the Polish zloty came off five-week lows hit earlier in the session against a steady euro. National Bank of Poland holds a one-day decision making monetary policy meeting on Wednesday with interest rates expected to be held.

For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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For CENTRAL EUROPE market report, see

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For RUSSIAN market report, see (Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu)

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