In this Tuesday, January 28, 2014 photo, people walk near an electric board showing currency rates at a money exchange brokerage in Istanbul, Turkey. (AP Photo/Emrah Gurel)
Ankara, AP—Turkey’s central bank has raised its key interest rate to 12 percent from 7.75 percent to try to stave off inflation and support the national currency, which has fallen sharply in recent weeks.
The decision was taken Tuesday at an emergency meeting the central bank called for after the currency, the lira, hit a record low.
The central bank said its goal is to lower the country’s inflation rate, which reached 7.4 percent in December. In a statement, it forecast that inflation will fall to its five percent target by mid-2015. The central bank said it would keep rates high until there are signs that inflation is declining.
The lira has been dropping amid concerns that a bribery scandal might destabilize the government. Like currencies in other emerging markets, the lira has also been battered by concerns over a slowdown in global growth and the potential impact of the withdrawal of the Federal Reserve’s stimulus in the United States.
A higher interest rate is intended to draw investor money into Turkey, which could boost the lira’s value.
Neil Shearing, an economist at the London-based Capital Economics, said the rate boost should help restore credibility to the central bank’s goal of reducing inflation and stabilizing its financial markets.
“This is clearly good news,” Shearing said.
In addition to raising its overnight lending rate to 12 percent, the central bank raised the rate on one-week borrowing from 4.5 percent to 10 percent. The rate on its late liquidity window was raised to 15 percent from 10.25 percent.
The surprisingly big interest rate hike seems to have, at least in the short-term, as the country’s currency surged on foreign exchange markets.
In morning trading on Wednesday, the lira was up 1.8 percent against the dollar at 2.2116 Turkish lira. Meanwhile, the main stock exchange was up 0.6 percent at 63,899.
Global stock markets also rose on Wednesday as jitters about emerging economies were soothed by the central bank’s decision.
In early European trading, major benchmarks were all up. Britain’s FTSE 100 rose 0.9 percent to 6,632.47. Germany’s DAX climbed 1.1 percent to 9,508.92 while France’s CAC-40 was up 1.1 percent at 4,230.52. Futures augured a higher opening on Wall Street. Dow Jones futures rose 0.5 percent to 15,949 and S&P 500 futures climbed 0.6 percent to 1,798.40.