Turkey dramatically raises interest rates in response to currency crisis

Updated January 29, 2014 11:22:10

Turkey's central bank has hiked interest rates sharply in response to the nation's currency hitting a record low.

At an emergency meeting the bank raised its overnight lending rate to 12 per cent from 7.75 per cent.

The overnight borrowing rate has been pushed to 8 per cent from 3.5 per cent, and the one-week repo rate has jumped from 4.5 to 10 per cent.

However, the bank said investors should treat the repo rate as the benchmark rather than the lending rate meaning the effective interest rate rise is not quite as high as the headlines suggest, although still at least 2 percentage points.

The move is designed to stop a slide in the lira which has been among a number of emerging market currencies that have been losing ground rapidly against the US dollar.

The weakness in emerging market currencies and strength in the greenback has been caused by speculation that the US Federal Reserve will accelerate its withdrawal of money printing stimulus measures, with have both seen funds flowing into the developing world and been putting downward pressure on the US dollar.

Turkey's currency has been hit harder than most due to ongoing political tensions in the country, including a corruption scandal that has claimed the scalps of several ministers.

Analysts say the rate rise is a sign that the central bank is keen on asserting its independence from a government that has pushed it to maintain a low interest rate policy.

"The central bank is taking a pretty big step towards regaining some of its lost credibility," London-based Neil Shearing from Capital Economics told Bloomberg.

"It's put the emphasis squarely on preserving market stability and tackling inflation, and at the same time it's faced down the government."

The steep interest rate rises had the desired effect on Turkey's lira, pushing it 3 per cent higher to 2.18 per US dollar.


First posted January 29, 2014 11:03:27