Turkey's Central Bank Aggressively Raises Rates

FRANKFURT - The Turkish lira, among the most battered of developing-market currencies in recent weeks, rose Tuesday amid expectations that the country's central bank would be forced to raise interest rates at an emergency policy meeting planned for the evening.

But it was unclear whether any move would be aggressive enough to satisfy international investors and repair the central bank's reputation for bowing to political pressure and keeping official rates artificially low to stimulate the economy.

Along with Argentina, Ukraine and Thailand, Turkey is among the countries whose domestic problems were more or less tolerated by international investors when the world was awash in cheap money. But now that the Federal Reserve has begun withdrawing its stimulus to the American economy, investors are taking a closer look and punishing countries like Turkey where there is both political turmoil and a monetary policy widely considered unsound by international economists.

'Although the Fed triggered the sell-off, the underlying problems are homegrown, and investors are starting to pay more attention to these domestic problems,' said Nicholas Spiro of Spiro Sovereign Strategy, a consulting firm. 'Turkey is a glaring example.'

The Central Bank of the Republic of Turkey said in a statement Monday that it would meet Tuesday evening, three weeks ahead of schedule, 'to discuss recent developments and take the necessary policy measures for price stability.' The central bank said it would announce its decision at midnight local time.

Turkey's currency, the lira, rose nearly 1 percent against the United States dollar to about 44 cents on Tuesday ahead of the central bank meeting, after losing 14 percent of its value in the previous two months and hitting a record low Monday. A weak lira raises the cost of imported goods, like oil for Turkish corporations, pushing up inflation and hurting growth.

The Turkish economy grew an estimated 4.3 percent last year, according to the World Bank, up from 2.2 percent in 2012. But there was concern about inflation, which the International Monetary Fund estimated would average 8 percent in 2013.

The central bank was expected to raise interest rates by 2 or even 3 percentage points. The central bank maintains three main rates, ranging from 4.5 percent for one-week loans to 10.25 percent for money borrowed at the end of the day, the so-called late liquidity window. It was unclear whether the central bank would raise all or just some of the rates, whose complexity has been another source of investor discontent. Higher interest rates would tend to push up the value of the lira, by offering a greater return on investments denominated in the Turkish currency.

But Mr. Spiro said investors would not be satisfied unless the central bank, perceived as being susceptible to pressure from Prime Minister Recep Tayyip Erdogan, promised to continue raising interest rates as much as needed to defend the lira's value.

'Markets want a firm commitment to mount a proper interest rate defense of the lira come what may,' Mr. Spiro said. But, he said, 'this is not a central bank prepared to give the market everything it wants.'

Monetary policy in Turkey is highly politicized. Mr. Erdogan is in the middle of a corruption scandal and faces increasing criticism both at home and abroad for his attempt to curb press freedoms and enact other authoritarian polices. Mr. Erdogan has spoken darkly of a foreign interest-rate lobby that he accuses of being determined to push up rates and stifle growth.

Erdem Basci, the governor of the central bank, denied that the institution was caving in to political pressure. 'In Turkey, politicians publicly criticize or praise central bank decisions,' Mr. Basci said at a news conference Monday, Reuters reported. 'I don't think it threatens the bank's independence.'

Mr. Erdogan may be willing to accept some increases in official interest rates to contain inflation. But any interest-rate increase would probably not be enough to reassure investors that the central bank is committed to supporting the lira, analysts said.

'The central bank is likely to remain constrained in its ability operate,' analysts at Eurasia Group said in a note, 'and will tend to move only incrementally.'

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