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Turkey Doubles Interest Rate to Halt Lira Slump

By Onur Ant 

Turkey’s central bank more than doubled its main interest rate at an emergency meeting, reversing years of policy after the lira slid to a record low.

The bank in Ankara raised the benchmark repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent.

The lira extended gains after the announcement, adding more than 3 percent at 12:12 a.m. in Istanbul.

The bank’s governor, Erdem Basci, is fighting to arrest a currency run that has gained speed as domestic political tensions overlap with global market shifts. A corruption scandal that broke last month has ensnared several cabinet members. It coincided with a flow of money out of emerging economies, weakening currencies from Brazil to South Africa, as the U.S. reduces monetary stimulus.

The Lira Reacts to Turkey's Continental Divide

A rate increase of at least 250 basis points may be needed to stop the lira’s slide, Royal Bank of Scotland Plc said in a report yesterday before the emergency meeting. “Turkey has exhausted all its other options,” it said.

Basci’s efforts to cushion the external and internal blows have been constrained by political opposition to raising borrowing costs as growth slows. While most investors advocate higher rates to bolster the lira, Prime Minister Recep Tayyip Erdogan has repeatedly railed against an “interest-rate lobby,” blaming it for a series of blows to his government, including last year’s wave of protests and the graft probe implicating his ministers.

Lira Crisis

It was a lira crisis that laid the foundations for Erdogan’s 11-year rule. The collapse of an International Monetary Fund program in 2001 led to a devaluation of more than 50 percent. In elections a year later, the parties that presided over the crisis were swept away, clearing a route for Erdogan’s Islamist-rooted movement to win a majority.

Erdogan says growth of 5 percent a year under his government has left Turkey’s economy less vulnerable to such shocks. The premier reiterated yesterday that he’s always been opposed to rate increases. Speaking in Ankara before leaving for Iran, he said he hoped the bank would make the right decision and usher in a “new era” for the Turkish currency.

Basci has accommodated the political pressures by developing a framework that allows him to tighten policy without raising headline rates, and vary monetary conditions day-to-day within an interest-rate corridor.

Currency Slide

At the last regular policy meeting on Jan. 21, he left the three main interest rates unchanged, even after the lira had declined 8 percent in a month. He opted instead to introduce a fourth rate of 9 percent, to be used only days when the bank decides extra tightening is needed.

As the currency’s slide picked up pace last week, Basci intervened directly in markets for the first time in more than two years, selling about $3 billion. That only accelerated the slump, leading the bank to reassemble last night.

The announcement on Jan. 27 of the emergency meeting helped the lira pare losses in the past two days, though stocks and bonds continued to drop.

The benchmark equity index reached an 18-month low yesterday, and has dropped 24 percent in dollar terms since news of the corruption inquiry broke on Dec. 17, the most among global benchmarks. Yields on two-year lira bonds closed above 11 percent yesterday for the first time since January 2012.

Turkey isn’t the only emerging nation to raise borrowing costs this month in response to plunging markets. India unexpectedly increased rates yesterday, and Brazil has pushed its benchmark higher for six straight meetings.

“Central banks in emerging markets are moving to stop the sell-off,” RBS said. “We think they will struggle to do so.”

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