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Turkish central bank hikes lending rates in bid to stem lira slide

Turkish Lira
Kerem Uzel | Bloomberg | Getty Images
Turkish Lira

Turkey's central bank raised its overnight lending rate by 50 basis points on Tuesday in a surprise bid to prevent a slide in the lira as worries about a reduction in U.S. stimulus hit emerging markets' currencies.

The bank kept its one-week repo policy rate at 4.50 percent and its overnight borrowing rate at 3.50 percent, it said in a statement after its monthly monetary policy committee meeting.

The move defied consensus expectations in a Reuters poll, with 13 out of 15 economists forecasting all rates would remain on hold. Only two forecast a 50 basis-point hike in the overnight lending rate, largely due to higher U.S. Treasury yields, which have put pressure on the lira.

(Read more: Turkey 'looks vulnerable' as unrest flares again)

The lira firmed to 1.9420 against the dollar after the announcement. The yield on the 10-year bond fell to 9.14 percent, from 9.25 beforehand.

"The central bank is trying still to keep the lira's head below the parapet, keep lira depreciation in the middle of the pack of emerging markets forex, while still focused on the uncertain outlook for growth," said Standard Bank economist Timothy Ash.

Growing expectations that the U.S. Federal Reserve may soon start tapering its stimulus programme has hit appetite for emerging market assets, and Turkey's gaping current account deficit leaves it particularly vulnerable.

(Read More: Turkish Finance Minister: Protests a 'hiccup' for economy)

Investors had been eager for signs that the central bank was serious about tightening liquidity to prevent capital outflows and help finance the country's large external funding needs, its main economic weakness.

Turkey is heavily dependent on foreign inflows to finance the gap, which is equivalent to around 7.1 percent of its economic output.

But the bank has also been reluctant to do anything that might stifle fragile economic growth.

It raised its overnight lending rate by 75 basis points to 7.25 percent last month in response to capital outflows that had pushed the lira down as much as 9 percent against the dollar in the preceding weeks.

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