Turkey's central bank raised interest rates by 300 basis points on Wednesday in an emergency move to put a floor under the plunging lira currency and regain investors' confidence shaken by interventions from President Tayyip Erdogan. The central bank, which had been scheduled to hold its next policy-setting meeting on June 7, said it had increased its top interest rate to 16.5 percent from 13.5 percent, prompting a sharp rally in the lira after it earlier tumbled five percent.
Investors had been betting the sharp selloff in the lira - it has fallen about 20 percent so far this year to a series of record lows - would force the bank into making such action. The currency reversed course after the decision and was about 1 percent firmer on the day at 4.6200 to the dollar at 1813 GMT. Earlier it had hit a record low of 4.9290.
"It is high time to restore monetary policy credibility and regain investor confidence," Deputy Prime Minister Mehmet Simsek said on Twitter, shortly before the central bank's announcement. Investors have sold off the lira on concerns about monetary policy particularly after Erdogan, a self-described "enemy of interest rates", said last week he expected to assert greater control over policy after elections on June 24. This deepened worries about the ability of the central bank's Monetary Policy Committee to tame double-digit inflation.
"Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee decided to implement a strong monetary tightening to support price stability," the bank said in its statement. "At long last. If they had listened to the markets weeks ago and done this back then they may have been able to get away with a lower rate hike," said Timothy Ash, an emerging markets debt strategist at BlueBay Asset Management. "They might still need to hike further on June 7, but at least this hike gives them a chance of getting there without much more damage."
The last time the central bank raised interest rates at an emergency meeting was in January 2014, in an attempt to stop a similar sell-off in the lira. Since then, the currency has lost more than half its value against the dollar. Annual inflation stood at 10.85 percent in April, and it has been as high as 12.98 percent in recent months.
Erdogan wants lower borrowing costs to fuel credit and economic growth, particularly as he heads into the parliamentary and presidential elections next month. But the Central Bank may have to raise rates further at its June 7 meeting, said Inan Demir, senior emerging markets economist at Nomura International. "I think it would be still too early to call the end of the lira weakness but obviously this is a good start for the central bank," Demir said.
Credit ratings agencies have also sounded the alarm about monetary policy. S&P Global senior sovereign analyst Frank Gill told Reuters earlier that government finances could deteriorate rapidly if authorities failed to stem pressure on the currency and government borrowing costs.
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