Turkey ramped up action in its increasingly desperate defence of the lira on Monday with the central bank calling a crisis meeting, prompting analysts to forecast a policy U turn and big rate rise.
The bank called the meeting for Tuesday after heavy intervention on the currency markets failed to stop a run on the lira, amid severe pressure on several emerging markets.
The currency crisis increases difficulties for the government, already facing a political crisis, and which has fought against a base rate rise for months as the lira has plunged.
In the middle of last year the central bank resorted to complex techniques rendering inoperative the base rate, and sharply raised short-term rates.
It also began measured intervention on the foreign exchange market but last week it was forced to intervene directly and heavily, but to little effect.
Turkish policy 'unpredictable'
Economists suggested that an emergency interest rate rise could be in the pipeline, but warned that Turkish monetary policy was "extremely unpredictable".
Some economists said that the bank could at least raise the overnight lending rate to 9.0 percent from the existing 7.75 percent, while others called for more aggressive action to obtain results and bolster the bank's credibility.
Turkey is a high profile victim of pressures piling up on emerging economies sparked by changes to the US monetary policy, but the government describe the latest pressure pushing the currency down to record low levels as "temporary".
The lira rallied slightly to 2.3168 shortly after the announcement of the policy meeting which came after the currency had hit another record low value against the dollar of 2.39 in morning trading.
The main Istanbul stock index gained by 0.12 percent to 64,504.46 points.
Since the middle of last year the central bank has spent heavily from its currency reserves. This has won only short-lived and costly respite each time.
"The Monetary Policy Committee is to convene on January 28 to evaluate recent developments and take precautions which are necessary for price stability," the bank said in a statement.
The decisions will be announced at 2200 GMT after Tuesday's meeting, it added. The bank will also release its quarterly inflation report earlier on Tuesday.
Economists said the news of the crisis meeting suggested that Turkish policymakers had realised that their efforts to tighten monetary conditions without raising official rates had failed.
"It's not clear whether policymakers will summon up the courage to defy government pressure and hike official policy rates," economist William Jackson at the London-based Capital Economics said.
"For now, though, we suspect that a hike in the O/N (overnight) lending rate (perhaps to 9.0 percent) is the most likely outcome," he said.
After its monthly policy meeting last week, Turkey's central bank held key interest rates unchanged, leaving its key overnight rate at 7.75 percent.
Reinhard Cluse, economist at Swiss bank UBS, said that if the central bank did not deliver "drastic policy action", selling of the lira and loss of confidence would increase sharply.
"Time to hike aggressively," said Inan Demir, chief economist at Istanbul-based Finansbank.
"We think that any rate hike needs to be aggressive enough to push short term rates firmly into double digit territory," he said, with the possibility of further increases.
Jackson said the bank's foreign exchange reserve coverage was "extremely thin," making intervention "fairly ineffective".
The central bank reportedly sold about $4 billion of foreign currency from its reserves last week -- equivalent to a tenth of its net reserves.
'No need to panic'
The fall of the lira is rooted in an escalating political crisis over the corruption scandal that ensnared key allies of Prime Minister Recep Tayyip Erdogan, as well as concerns about the economy and payments deficit.
But government officials insist that the strains are merely "temporary" in nature.
"There is no need to panic," local media quoted Economy Minister Nihat Zeybekci as saying.
The government is worried that a rate rise could jeopardise growth which it has forecast will pick up from an expected rate of 3.6 percent in 2013 to 4.0 percent for this year -- down from more than 8.0 percent achieved in 2010 and 2011.
The European Bank for Reconstruction and Development has cut its forecast to 3.3 percent.
Turkey, like other emerging markets, is also vulnerable to US Federal Reserve plans to taper its monetary stimulus. This reduces access for Turkey to funds to cover its account deficit, currently at over 7.0 percent of gross domestic product.
Capital Economics said in a statement that market turbulence in emerging markets including Turkey had led to talk of a "new crisis".
Turkey ramped up action in its increasingly desperate defence of the lira on Monday with the central bank calling a crisis meeting, prompting analysts to forecast a policy U turn and big rate rise.
The bank called the meeting for Tuesday after heavy intervention on the currency markets failed to stop a run on the lira, amid severe pressure on several emerging markets.
The currency crisis increases difficulties for the government, already facing a political crisis, and which has fought against a base rate rise for months as the lira has plunged.
In the middle of last year the central bank resorted to complex techniques rendering inoperative the base rate, and sharply raised short-term rates.
It also began measured intervention on the foreign exchange market but last week it was forced to intervene directly and heavily, but to little effect.
Turkish policy ‘unpredictable’
Economists suggested that an emergency interest rate rise could be in the pipeline, but warned that Turkish monetary policy was “extremely unpredictable”.
Some economists said that the bank could at least raise the overnight lending rate to 9.0 percent from the existing 7.75 percent, while others called for more aggressive action to obtain results and bolster the bank’s credibility.
Turkey is a high profile victim of pressures piling up on emerging economies sparked by changes to the US monetary policy, but the government describe the latest pressure pushing the currency down to record low levels as “temporary”.
The lira rallied slightly to 2.3168 shortly after the announcement of the policy meeting which came after the currency had hit another record low value against the dollar of 2.39 in morning trading.
The main Istanbul stock index gained by 0.12 percent to 64,504.46 points.
Since the middle of last year the central bank has spent heavily from its currency reserves. This has won only short-lived and costly respite each time.
“The Monetary Policy Committee is to convene on January 28 to evaluate recent developments and take precautions which are necessary for price stability,” the bank said in a statement.
The decisions will be announced at 2200 GMT after Tuesday’s meeting, it added. The bank will also release its quarterly inflation report earlier on Tuesday.
Economists said the news of the crisis meeting suggested that Turkish policymakers had realised that their efforts to tighten monetary conditions without raising official rates had failed.
“It’s not clear whether policymakers will summon up the courage to defy government pressure and hike official policy rates,” economist William Jackson at the London-based Capital Economics said.
“For now, though, we suspect that a hike in the O/N (overnight) lending rate (perhaps to 9.0 percent) is the most likely outcome,” he said.
After its monthly policy meeting last week, Turkey’s central bank held key interest rates unchanged, leaving its key overnight rate at 7.75 percent.
Reinhard Cluse, economist at Swiss bank UBS, said that if the central bank did not deliver “drastic policy action”, selling of the lira and loss of confidence would increase sharply.
“Time to hike aggressively,” said Inan Demir, chief economist at Istanbul-based Finansbank.
“We think that any rate hike needs to be aggressive enough to push short term rates firmly into double digit territory,” he said, with the possibility of further increases.
Jackson said the bank’s foreign exchange reserve coverage was “extremely thin,” making intervention “fairly ineffective”.
The central bank reportedly sold about $4 billion of foreign currency from its reserves last week — equivalent to a tenth of its net reserves.
‘No need to panic’
The fall of the lira is rooted in an escalating political crisis over the corruption scandal that ensnared key allies of Prime Minister Recep Tayyip Erdogan, as well as concerns about the economy and payments deficit.
But government officials insist that the strains are merely “temporary” in nature.
“There is no need to panic,” local media quoted Economy Minister Nihat Zeybekci as saying.
The government is worried that a rate rise could jeopardise growth which it has forecast will pick up from an expected rate of 3.6 percent in 2013 to 4.0 percent for this year — down from more than 8.0 percent achieved in 2010 and 2011.
The European Bank for Reconstruction and Development has cut its forecast to 3.3 percent.
Turkey, like other emerging markets, is also vulnerable to US Federal Reserve plans to taper its monetary stimulus. This reduces access for Turkey to funds to cover its account deficit, currently at over 7.0 percent of gross domestic product.
Capital Economics said in a statement that market turbulence in emerging markets including Turkey had led to talk of a “new crisis”.
