Jan. 29 (Bloomberg) -- The lira swung between gains and losses as traders assessed whether a doubling of interest rates would be enough to stem capital outflows in the face of further reductions in U.S. monetary stimulus. Stocks fell.
The Turkish currency strengthened more than 4 percent following the central bank’s midnight rates decision before depreciating as much as 2.4 percent. It climbed 0.5 percent to 2.2407 per dollar at 7:23 p.m. in Istanbul. Yields on two-year benchmark notes decreased 18 basis points to 10.88 percent and the Borsa Istanbul 100 Index of shares slumped 2.3 percent.
Governor Erdem Basci is fighting to restore credibility eroded by a currency run that gained speed amid domestic upheaval and a global rout of emerging markets. Prime Minister Recep Tayyip Erdogan, who said yesterday he’s always opposed higher rates, is embroiled in a graft scandal that has ensnared several ministers and the chief executive officer of a state-owned bank. It spooked investors just as the reduction of U.S. monetary stimulus began sucking money out of riskier assets.
“The immediate knee-jerk reaction last night was that the Central Bank of Turkey had in some sense passed an important test,” David Simmonds, the head of currency and emerging-markets strategy at Royal Bank of Scotland Group Plc in London, said in an e-mail. “The broader perspective that having to raise rates to defend your currency is ultimately a very tough place fundamentally to be, so broader macro pressures persist.”
Turkey’s central bank raised all its main interest rates at an emergency late-night meeting in an effort to shore up the lira, resisting government pressure and reversing years of policy aimed at stoking growth. Interest rates had been on hold since August.
The Ankara-based bank increased the one-week repurchase rate to 10 percent from 4.5 percent, while lifting the overnight lending rate to 12 percent from 7.75 percent and the overnight borrowing rate to 8 percent from 3.5 percent.
Emerging-market assets are losing their luster as the Fed scales back its $75 billion of monthly bond purchases and amid concern that Chinese growth is slowing. Fed policy makers will probably decide to reduce monetary stimulus by $10 billion at a meeting that ends today, according to a Bloomberg News survey of economists on Jan. 10.
South Africa’s rand appreciated as much as 1.3 percent today before tumbling to a five-year low against the dollar after the nation’s central bank unexpectedly raised its policy rate by 50 basis points to 5.5 percent, the first increase since 2008. The rand dropped as much as 3.1 percent to 11.3803 per dollar, the lowest level since October 2008, before trimming the retreat to 11.2246.
The Turkish central bank said the one-week repo rate should be treated as the benchmark policy tool. Since it had previously been encouraging investors to use the overnight lending rate as the main guideline, the move amounts to an effective tightening of between 200 and 400 basis points, Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd. in London.
Turkey’s financial markets have plunged since news of the corruption scandal broke last month, leading to the departure of three cabinet members whose sons were detained in the probe. That coincided with a flow of money out of emerging economies that weakened currencies from Brazil to South Africa.
“Let’s not forget that the trigger for the selloff was political and that very much remains in place,” Abbas Ameli-Renani, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in an e-mailed report. “Political noise” is expected to rise significantly as Turkey approaches March 30 local elections, he said.
Erdogan’s response to the graft investigation has been to accuse a “gang” within the police and judiciary loyal to U.S.- based Islamic cleric Fethullah Gulen of attempted treason.
Basci has been constrained by political opposition to raising borrowing costs as growth slows. While economists and investors advocated higher rates to bolster the lira, Erdogan has repeatedly railed against an “interest-rate lobby,” blaming it for last year’s wave of protests and the graft probe implicating members of his government.
At the last regular policy meeting on Jan. 21, Basci left the three main interest rates unchanged, even after the lira had declined almost 7 percent in the previous month. He opted instead to introduce a fourth rate of 9 percent, to be used only days when the bank decides extra tightening is needed.
As the currency’s slide picked up pace last week, Basci intervened unannounced in markets for the first time in more than two years, selling about $3 billion. That only accelerated the slump, leading the bank to reassemble last night.
It was a currency crisis that laid the foundations for Erdogan’s 11-year rule. The collapse of an International Monetary Fund program in 2001 led to a devaluation of more than 50 percent. In elections a year later, the parties that presided over the slump were swept away, clearing a route for Erdogan’s Islamist-rooted movement to win a majority.
Erdogan says growth of 5 percent a year under his government has left Turkey’s economy less vulnerable to such shocks. The premier reiterated yesterday that he’s always been opposed to rate increases. Speaking in Ankara before leaving for Iran, he said he hoped the bank would make the right decision and usher in a “new era” for the Turkish currency.
Before today, Basci accommodated the political pressures by developing a system of multiple benchmarks that allowed him to tighten policy without raising headline rates and vary monetary conditions day-to-day within an interest-rate corridor.
The bank said today it would seek “to simplify the operational framework” in an effort to achieve price stability. It took another step to that end today, announcing an immediate end to “extra tightening days,” on which it did not lend at the one-week repo rate.
As well as Turkey and South Africa, India unexpectedly increased rates yesterday, and Brazil has pushed its benchmark higher for six straight meetings.
“Real rates aren’t high enough to guarantee de-dollarization,” Manik Narain, a currency strategist at UBS AG in London, said in an e-mail. “Local demand for dollars won’t reverse at this level.”