Central Bank takes a giant step by increasing interest rates from 7.75 to 12 percent

Turkey’s Central Bank has taken a giant step by increasing interest rates from 7.75 to 12 percent after which Turkish Lira has started exploding high.

Turkey increased its overnight lending rate to 12% from 7.75% and the overnight borrowing rate to 8% from 3.5%, late Tuesday. Central Bank of Turkey raised interest rates to stem the Turkish lira’s slide and to bring stability to a region caught up in the emerging-market turmoil. The lira jumped 2.6% against the dollar on the announcement.

The decision came after the Turkish currency had tumbled more than 5% in the past month. Slowing economic growth and a political corruption probe weighed on the lira in recent weeks.

The move reverberated back to the U.S., as stock futures jumped immediately on the announcement. Dow futures recently rose 134 points, while S&P 500 futures added 20 points.

“The S&P futures are ripping higher because the central bank in Turkey stepped up to the plate and raised interest rates well above what was expected,” said Peter Boockvar, managing director at the Lindsey Group.

Turkey’s predicament is similar to that of many emerging-market countries, which are under political pressure to keep interest rates low to keep economic growth on track, despite the inflationary effects. Turkey’s prime minister, Recep Tayyip Erdogan, reiterated Tuesday that he opposed any interest-rate increase, although he stressed that he didn’t have authority to tell the central bank what to do.

Turkey’s central bank could prove a bellwether for other emerging markets trying to combat capital flight and rising inflation without crippling their economies through excessive interest-rate hikes. South Africa, for instance, faces a similar mix of weakening growth and high inflation, putting pressure on its central bank to raise interest rates.

29.01.2014
SOURCE: MEDIA