Investing.com - Turkey’s central bank unveiled a series of dramatic rate hikes at an emergency monetary policy meeting overnight, in a bit to stave off inflation and shore up the lira, which has fallen sharply in recent weeks.
The bank raised its overnight lending rate to 12% from 7.75%, raised its one-week repo rate to 10% from 4.5% and raised its overnight borrowing rate to 8% from 3.5%. The move was much more hawkish than analysts had been expecting.
The central bank said its aim is to lower the country’s inflation rate, which accelerated to 7.4% in December. The bank forecast that inflation will fall back to its 5% target by mid-2015.
In its rate statement, the bank said its new “tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook”.
In its quarterly inflation released earlier Tuesday, the bank revised its year-end inflation forecast sharply higher, to 6.6% up from 5.3% and stressed that the outlook for the global economy had darkened.
The lira had fallen to a series of record lows against the dollar since the beginning of January, dropping almost 11%, before rebounding ahead of the emergency central bank meeting on Tuesday.
The lira rallied almost 4% against the dollar immediately following the announcement, before retracing some of those gains to trade up 1.55%.
Turkey’s central bank left rates unchanged at its scheduled meeting last week, amid political pressure to avoid higher borrowing costs, which could act as a drag on growth. The lira continued to spiral to record lows after a direct currency market intervention by the central bank on Thursday failed to stem the steep depreciation in the currency.
Turkey’s lira is seen as particularly vulnerable to reductions in the Federal Reserve’s asset purchase program, as the country is heavily dependent on foreign investment to fund its huge current account shortfall.
The selloff in the lira has also fuelled by investor concerns over local political tensions after a wide ranging corruption probe launched in December focusing on figures close to the government forced a cabinet reshuffle.
The lira remained vulnerable ahead of Wednesday’s policy statement by the Fed amid expectations that the bank will cut its asset purchase program by another $10 billion, to $65 billion per month. The central bank announced the first cut to its stimulus program in December.