A massive rate hike may have stalled the Turkish lira's fall and salvaged the central bank's credibility, but it stunts growth at a politically fraught time for Prime Minister Tayyip Erdogan and may not shield Turkey from a fragile global backdrop for long.
Erdogan, a vociferous opponent of higher interest rates, was reported as saying after the central bank move that he may announce an "out of the ordinary" economic package in the coming days or weeks, heightening an atmosphere of uncertainty.
The bank raised all its key interest rates in dramatic fashion at an emergency policy meeting late on Tuesday, ignoring opposition from Erdogan as it battled to defend the lira following its fall to a series of record lows.
The boldness of the actions stunned investors, propelling the lira to its biggest one-day gain in more than five years and stirring hopes it would short-circuit a vicious cycle of selling in emerging markets.
But gains of almost 4 percent on the day quickly faded in later trade on Wednesday as market focus switched to a later monetary policy decision by the U.S. Federal Reserve.
Erdogan, keen to maintain growth ahead of an election cycle starting in two months, has frequently railed against what he describes as an "interest rate lobby" of speculators seeking to stifle growth and undermine the economy.
Asked if he had an alternative strategy to higher rates, Erdogan was quoted by pro-government newspaper Yeni Safak as saying on his return from a trip to Iran: "As for a Plan B or a Plan C or whatever, we may be able to announce our work on this in the coming days ... or maybe weeks.
Finance Minister Mehmet Simsek played down the impact on growth, saying the economy would have suffered greater damage if the credibility of the central bank had been undermined.
"If we don't preserve credibility, growth would lose ground on a much bigger scale. It would weaken much more rapidly," Simsek told Turkish broadcaster NTV.
Erdogan has overseen strong economic growth since coming to power in 2002, transforming Turkey's reputation after a series of unstable coalition governments in the 1990s ran into repeated balance of payments problems and economic crises.
But his increasingly authoritarian style - from a heavy-handed police crackdown on street protests last summer to his reaction to the corruption investigation in recent weeks - has started to unnerve investors.
The graft scandal, which triggered the resignation of three government ministers and the detention of businessmen close to Erdogan, has grown into one of the biggest challenges of his 11 years at the helm, just as he prepares for local elections in March and a presidential race five months later.
He reacted by purging the police force of thousands of officers and seeking tighter control over the courts. The response has been criticized by the European Union and raised investor concern over the rule of law and independence of state institutions.
The central bank's rate hike after Erdogan's opposition helps the case that institutions still function independently.
Source: Reuters
