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Turkish rate rise boosts lira, defies government

ANKARA--The Turkish lira rallied on Wednesday after the central bank ramped up interest rates, defying the government and staging a pre-emptive move in case U.S. authorities tighten monetary policy.

But in morning trading the initial boost began to run out of steam.

The central bank doubled a key rate to 10.0 percent in a dramatic crisis defense of the currency which will be closely followed by other emerging countries under market pressure.

The lira rose after the decision at midnight, which comes amid the Turkish regime's most damaging political crisis for a decade.

The U turn on policy sets the bank face-to-face with Prime Minister Recep Tayyip Erdogan who said only hours before that he did not want rates to rise.

Analysts say policymakers in emerging economies will closely watch the effects of the Turkish move, with the U.S. Federal Reserve central bank due to announce its policy decision later in the day.

They also said that the aggressive decision would help to restore the credibility of the central bank which had been under pressure from the government for months to avoid raising rates.

The central bank increased its overnight lending rate to 12 percent from 7.75 percent, the overnight borrowing rate from 3.5 percent to 8.0 percent, and the pivotal one-week repo rate to 10.0 percent from 4.5 percent.

The lira rebounded to 2.1935 to the dollar and 3.001 to the euro in morning trading on Wednesday.

That was down from 2.25 to the dollar and 3.09 to the euro just before the decision.

The currencies of emerging economies have taken a severe beating recently, due in part to U.S. Federal Reserve policy reducing stimulus measures. This tends to suck cash out of emerging markets back to the United States.

Fed Tapering Hits Emerging Markets

On Tuesday, the central bank of India announced a surprise decision to raise its key rate by a quarter of a point to 8.0 percent. Among other emerging countries in currency turmoil are Argentina, South Africa, and Russia.

The Fed tapering “hits countries that tend to fund their deficits with short term money flows like Turkey,” said Kathleen Brooks, research director at Forex.com.

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