ANKARA: Turkey ramped up its overnight rate by half a point to 7.75 percent yesterday in a new defence of the lira as emerging markets come under pressure from US monetary policy.
The increase demonstrates a clear switch of direction on rates despite recent political pressure against a rate rise, follows recent intervention to support the lira, and is the latest sign of turmoil in emerging economies.
The rate decision supported the lira which was being quoted at 1.9461 in late afternoon trading from 1.9506 to the dollar at the close on Monday.
The lira has fallen by about 10 percent since February, when it was at a 12-month peak of 1.7460 lira to the dollar.
But it is still slightly above a 12-month low of 1.96590 lira to the dollar set in early July, forcing the central bank to take urgent measures.
Analysts said that the rate increase was not enough, and one suggested that the rate would probably rise to 9.0 percent.
Raising the overnight rate should discourage speculators from borrowing money to bet that the lira will fall further, but will also harm Turkish companies which use short-term money to fund their operations.
However, the central bank, which has statutory independence, held its key rate at 4.5 percent. It had cut the rate to this level in May, although in May and June the country was hit by deep civil unrest.
Muhammet Mercan, senior economist at ING Bank, said the pace of tightening would depend on data flow, and “the 1-week rate, in particular, is only likely to be adjusted when the Fed actually shifts its policy stance.”
Emerging market currencies have been hit by expectations that an increasingly buoyant United States will soon roll back stimulus measures that had driven huge inflows of foreign investment funds into emerging markets in search of higher yields than in the West.
Some of this money is now being withdrawn from emerging economies, and Turkey has been one of the emerging economies hardest hit by the expected shift in US monetary conditions.