Turkish Lira Underpinned by Rate Rise

The Turkish lira (TL), one of several emerging market (EM) currencies to have faced heavy selling pressure in recent days, rallied after the Central Bank of the Republic of Turkey raised all of its main interest rates following an emergency late-night meeting to shore up the currency.

The overnight lending rate was hiked to 12% from 7.75% and the Bank also increased the overnight borrowing rate to 8% from 3.5%, in an effort to stabilise the TL’s value. The one-week repo rate was raised to 10% from 4.5%. The currency immediately strengthened after the Bank’s announcement, to TL2.2 to the US dollar from TL2.253.

The Bank had previously held back from talking action on fears that a rate rise could hurt Turkish economy. In a statement, it said that the move was intended to curb inflation, which last month reached 7.4%. Governor Erdem Basci is also attempting to halt the currency’s slide that has gained momentum due to domestic upheaval and also investor concern over the outlook for the EMs.

Turkey’s prime minister, Recep Tayyip Erdogan, said that he has consistently opposed higher rates. However, he is currently at the centre of graft allegations leveled at several ministers and the chief executive officer (CEO) of state-owned Halkbank. The corruption and bribery allegations led to a cabinet reshuffle a month ago.

Despite the problems, the government has forecast that Turkey’s economic growth rate will rise from an expected figure of 3.6% in 2013 to 4% for this year, although this would still only be half the 8% growth rate Turkey achieved in both 2010 and 2011.

The cost of Turkey’s debt had also been rising rapidly with the price of 10-year bonds hitting a three-year high, as investors worried that the bribery scandal could destabilise the government

Turkey’s rate increase has been accompanied by similar action in India and Brazil. “Actions being taken by central banks in diverse countries such as Brazil, India and now Turkey should help allay investor concerns,” commented Sam Vecht, a portfolio manager at Blackrock Emerging Europe Investment Trust.

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