The Turkish lira rallied on Wednesday after the central bank ramped up interest rates, defying the government and staging a pre-emptive move in case US authorities tighten monetary policy.
But in morning trading the initial boost began to run out of steam.
The central bank doubled a key rate to 10.0 percent in a dramatic crisis defence of the currency which will be closely followed by other emerging countries under market pressure.
The lira rose after the decision at midnight, which comes amid the Turkish regime's most damaging political crisis for a decade.
The U turn on policy sets the bank face-to-face with Prime Minister Recep Tayyip Erdogan who said only hours before that he did not want rates to rise.
Analysts say policymakers in emerging economies will closely watch the effects of the Turkish move, with the US Federal Reserve central bank due to announce its policy decision later in the day.
They also said that the aggressive decision would help to restore the credibility of the central bank which had been under pressure from the government for months to avoid raising rates.
The central bank increased its overnight lending rate to 12 percent from 7.75 percent, the overnight borrowing rate from 3.5 percent to 8.0 percent, and the pivotal one-week repo rate to 10.0 percent from 4.5 percent.
The lira rebounded to 2.1935 to the dollar and 3.001 to the euro in morning trading on Wednesday.
That was down from 2.25 to the dollar and 3.09 to the euro just before the decision.
The currencies of emerging economies have taken a severe beating recently, due in part to US Federal Reserve policy reducing stimulus measures. This tends to suck cash out of emerging markets back to the United States.
On Tuesday, the central bank of India announced a surprise decision to raise its key rate by a quarter of a point to 8.0 percent. Among other emerging countries in currency turmoil are Argentina, South Africa, and Russia.
The Fed tapering "hits countries that tend to fund their deficits with short term money flows like Turkey," said Kathleen Brooks, research director at Forex.com.
Brooks listed Turkey among those countries with shaky economic fundamentals, particularly current account deficits, along with India, Indonesia, South Africa and Thailand.
Deniz Cicek, economist at Finansbank in Turkey, hailed the central bank's decision as a "striking shift towards orthodoxy" in a statement.
"In our view, a shift to a simpler framework, along with a message of commitment to sustain the tight monetary policy stance until there is a significant improvement in the inflation outlook also pleased the markets," he said.
He did not rule out further increases in the one week repo rate.
Analysts said the central bank's governor Erdem Basci defied the government with bold action.
The central bank "left nobody in doubt on Tuesday night when they hiked interest rates," Gillian Edgeworth, economist at UniCredit Research, said.
"Following the turmoil of the past few weeks, tonight's meeting probably had to deliver two things in order to stabilise Turkish financial markets," Neil Shearing, chief emerging markets economist at the London-based Capital Economics, said.
"First, it had to deliver a substantial tightening of policy. And second, the policy tightening had to be delivered in a clear and transparent way ... On both counts, tonight's meeting delivered about as much as could reasonably have been expected".
But Erdogan's opposition to an increase hours before the decision had left some doubt as to whether decisive action would be taken.
"I am opposed to interest rate increases now as I always have been," Erdogan said, though he acknowledged the bank was independent.
"They will be held accountable for anything that could emerge tomorrow," he said.
"The Turkish economy is quite robust and it is pressing ahead in a resilient way," he assured.
Erdogan's government wants rates held down to sustain growth ahead of an election cycle beginning with March local polls.
Until now, the bank has avoided a sharp rise in the base rate, using a big increase in the overnight rate and intervening heavily on the foreign exchange market.
Some analysts estimated in July last year, when the bank began intervention, that it had about $46 billion dollars (34 billion euros) available but since then it has spent heavily, using up to $4 billion in the last few days alone.
And those costly measures have failed to protect the lira.
The Turkish currency has been hitting record lows almost daily and has lost about 10 percent since mid-December, when a corruption scandal roiling key Erdogan allies became public.
On Tuesday, the central bank sharply raised its inflation forecast for 2014 to 6.6 percent from 5.3 percent.
The Turkish lira rallied on Wednesday after the central bank ramped up interest rates, defying the government and staging a pre-emptive move in case US authorities tighten monetary policy.
But in morning trading the initial boost began to run out of steam.
The central bank doubled a key rate to 10.0 percent in a dramatic crisis defence of the currency which will be closely followed by other emerging countries under market pressure.
The lira rose after the decision at midnight, which comes amid the Turkish regime’s most damaging political crisis for a decade.
The U turn on policy sets the bank face-to-face with Prime Minister Recep Tayyip Erdogan who said only hours before that he did not want rates to rise.
Analysts say policymakers in emerging economies will closely watch the effects of the Turkish move, with the US Federal Reserve central bank due to announce its policy decision later in the day.
They also said that the aggressive decision would help to restore the credibility of the central bank which had been under pressure from the government for months to avoid raising rates.
The central bank increased its overnight lending rate to 12 percent from 7.75 percent, the overnight borrowing rate from 3.5 percent to 8.0 percent, and the pivotal one-week repo rate to 10.0 percent from 4.5 percent.
The lira rebounded to 2.1935 to the dollar and 3.001 to the euro in morning trading on Wednesday.
That was down from 2.25 to the dollar and 3.09 to the euro just before the decision.
The currencies of emerging economies have taken a severe beating recently, due in part to US Federal Reserve policy reducing stimulus measures. This tends to suck cash out of emerging markets back to the United States.
On Tuesday, the central bank of India announced a surprise decision to raise its key rate by a quarter of a point to 8.0 percent. Among other emerging countries in currency turmoil are Argentina, South Africa, and Russia.
The Fed tapering “hits countries that tend to fund their deficits with short term money flows like Turkey,” said Kathleen Brooks, research director at Forex.com.
Brooks listed Turkey among those countries with shaky economic fundamentals, particularly current account deficits, along with India, Indonesia, South Africa and Thailand.
Deniz Cicek, economist at Finansbank in Turkey, hailed the central bank’s decision as a “striking shift towards orthodoxy” in a statement.
“In our view, a shift to a simpler framework, along with a message of commitment to sustain the tight monetary policy stance until there is a significant improvement in the inflation outlook also pleased the markets,” he said.
He did not rule out further increases in the one week repo rate.
Analysts said the central bank’s governor Erdem Basci defied the government with bold action.
The central bank “left nobody in doubt on Tuesday night when they hiked interest rates,” Gillian Edgeworth, economist at UniCredit Research, said.
“Following the turmoil of the past few weeks, tonight’s meeting probably had to deliver two things in order to stabilise Turkish financial markets,” Neil Shearing, chief emerging markets economist at the London-based Capital Economics, said.
“First, it had to deliver a substantial tightening of policy. And second, the policy tightening had to be delivered in a clear and transparent way … On both counts, tonight’s meeting delivered about as much as could reasonably have been expected”.
But Erdogan’s opposition to an increase hours before the decision had left some doubt as to whether decisive action would be taken.
“I am opposed to interest rate increases now as I always have been,” Erdogan said, though he acknowledged the bank was independent.
“They will be held accountable for anything that could emerge tomorrow,” he said.
“The Turkish economy is quite robust and it is pressing ahead in a resilient way,” he assured.
Erdogan’s government wants rates held down to sustain growth ahead of an election cycle beginning with March local polls.
Until now, the bank has avoided a sharp rise in the base rate, using a big increase in the overnight rate and intervening heavily on the foreign exchange market.
Some analysts estimated in July last year, when the bank began intervention, that it had about $46 billion dollars (34 billion euros) available but since then it has spent heavily, using up to $4 billion in the last few days alone.
And those costly measures have failed to protect the lira.
The Turkish currency has been hitting record lows almost daily and has lost about 10 percent since mid-December, when a corruption scandal roiling key Erdogan allies became public.
On Tuesday, the central bank sharply raised its inflation forecast for 2014 to 6.6 percent from 5.3 percent.
