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After an emergency midnight meeting yesterday, Turkey's central bank acted in defiance of the country's prime minister and raised its overnight lending rate to 12% from 7.75%. The move came in the context of declines in the lira and other emerging market currencies. In the last year, the lira has fallen more than 20% against the dollar, and is down 4.25% in the last month.
The lira strengthened against the dollar after the announcement, but the gains proved transient and were gone just 16 hours after the announcement. The lira ended Wednesday essentially flat, down 0.22% against the dollar.
The NYT’s Jack Ewing and Landon Thomas Jr explain the central bank’s strategy: “Higher interest rates tend to push up the value of the lira, by offering a greater return on investments denominated in the Turkish currency”. The central bank, say Ewing and Thomas, is worried that a weak lira will drive up the price of imported goods, increasing inflation (which was 7.49% last year) and hurting growth.
Menzie Chinn thinks domestic political concerns explain the lira’s fall: Prime Minister Erdogan is at the center of a corruption scandal and has accused the not-fully independent central bank of representing an vague “interest-rate lobby” who want to harm Turkey’s economy. One government minister said that the rise in interest rates benefited those who wanted to "suck Turkey's blood".