Crisis action by the Turkish Central Bank doubling its key interest rates gave only brief relief to the lira which fell back as emerging markets faced a U.S. monetary policy decision on Jan. 29.
The Turkish decision was closely watched in emerging markets where the South African Central Bank followed with a half-point rise in its key rate.
The Turkish bank defied political pressure to double its key interest rate to 10.0 percent to attract funds and fight a run on the currency.
The lira leapt by about 3.0 percent overnight in response to the Central Bank’s U-turn. But during trading on Jan. 29, the lira lost its gains. Before the decision it stood at 2.25 to the dollar, it then shot up to 2.17, but later was down to 2.3.
But it was still well above the record low of 2.39 to the dollar it reached at one point on Jan. 27. The lira also slipped to 3.11 to the euro compared with 3.09 before the decision.
The Istanbul stock exchange lost by 3.75 percent to 61,162.35 points.
Asian stocks rose on Jan. 27, with the Turkish bank providing a shot of confidence amid turmoil in emerging markets. European stocks also rose, but fell back as the time approached for the U.S. Federal Reserve central bank to say later if it will reduce further its huge stimulus to the U.S. economy.
Analysts say policymakers in other emerging economies were closely watch the effects of the Turkish move.
South Africa’s Reserve Bank followed Turkey by raising its main interest rate by 50 basis points to 5.5 percent, amid sustained pressure on the rand and rising inflation.
Only hours before the decision Erdoğan warned that the bank would be responsible for any ensuing slowdown in growth.
But the bank went ahead, increasing its overnight lending rate to 12 percent from 7.75 percent, the overnight borrowing rate from 3.5 percent to 8.0 percent, and the pivotal one-week repo rate to 10.0 percent from 4.5 percent.
The currencies of emerging economies have taken a severe beating recently, due in part to U.S. Federal Reserve policy reducing stimulus measures. This tends to suck cash out of emerging markets back to the United States.
The Fed tapering “hits countries that tend to fund their deficits with short term money flows like Turkey,” said Kathleen Brooks, research director at Forex.com.
Brooks listed Turkey among those countries with shaky economic fundamentals, particularly current account deficits, along with India, Indonesia, South Africa and Thailand.
Finance Minister Mehmet Simsek praised the Central Bank’s decision. “If they made such a decision, I am sure it is the best one,” he told Turkish television, adding that the bank’s credibility was “critical”.
Erdoğan’s government wants rates held down to sustain growth ahead of an election cycle beginning with March local polls.