The Turkish central bank raised its overnight lending rate to 12 % from 7.75% and the overnight borrowing rate to 8% from 3.5% late Tuesday evening, in a surprisingly strong move to defend the country’s beleaguered currency.
The lira immediately strengthened to 2.2 to the US$ from 2.253 after the decision. The rate hike was much steeper than expected.
Investors have become increasingly concerned about the potential effect of a destabilised Turkish government following news of investigations into high level corruption, causing the value of the lira plummet.
Central bank has been under pressure by the government not to raise interest rates as local elections approach in March, followed by a presidential election in August. The general elections are slated for 2015, but some pundits say that this could be brought forward depending on the political and economical fallout of the current crises.
However, Central bank’s governor Erdem Basci said last night that Central bank was independent and would not hesitate to take all necessary steps to bolster the lira.