Turkey's central bank defies govt on rate rise

Basci: Nobody should have any hesitation that the central bank will use all available tools

ISTANBUL - Turkey's central bank, fighting to defend the lira, sent strong signals on Tuesday that it is about to raise interest rates in a policy U turn and in defiance of the government.
The lira and stock market rallied in morning trading ahead of a crisis meeting later and decision around midnight.
The central bank said it would not hesitate to tighten monetary policy in a "lasting way" and noted that the situation justified use of the interest rate tool.
"Nobody should have any hesitation that the central bank will use all available tools," the bank's governor Erdem Basci said during a press conference in Ankara.
"The bank will not hesitate to take steps to make lasting tightening in monetary policy if deemed necessary," he said.
The bank also raised its outlook for inflation.
The bank, which called the crisis meeting after heavy intervention into the foreign currency markets failed to arrest the fall of the lira, is widely expected to raise its overnight lending rate to at least 9.0 percent.
The meeting comes as Turkey is rocked by a mounting political crisis which threatens Prime Minister Recep Tayyip Erdogan and the country's once-booming economy.
The government has applied strong pressure to prevent a rise in base interest rates, and on Tuesday Erdogan played down the pressures, insisting that the economy was still going strongly.
"The Turkish economy is quite robust and it is still proceeding in a resilient way," Erdogan told a parliamentary gathering.
The government has pressured the central bank not to raise interest rates so as to sustain growth ahead of a highly-charged election cycle beginning with March local polls.
Until now, the bank has avoided a sharp rise in the base rate, using a big increase in the overnight rate -- held at 7.75 percent last week -- and intervening heavily with its reserves on the foreign exchange market.
But these costly measures have failed to protect the lira.
The Turkish currency has been hitting record lows almost daily and has lost about 10 percent since mid-December, when a corruption scandal ensnaring key government allies became public.
Like other emerging market currencies, the lira has also been hit from the US Federal Reserve's decision to reduce its stimulus measures, of which Turkey has been one of the main beneficiaries.
But amid expectations of an increase in base rates, the currency recovered to 2.2583 on Tuesday, after hitting an all-time low of 2.3331 to the dollar and 3.1950 to the euro.
Higher interest rates 'on the cards'
The main Istanbul stock index, which has lost about 20 percent of its value over the past year, gained 1.26 percent to 65,382.07 points.
The central bank raised sharply its inflation forecast for 2014 to 6.6 percent from 5.3 percent on Tuesday.
Although the bank assured that the inflation would slow from the second half of 2014, analysts said that it was likely to remain high this year.
"The higher inflation forecast really just reflects reality - core inflation in Turkey is high and, with tax hikes and the weaker lira, inflation is likely to remain persistently high this year," economist William Jackson at the London-based Capital Economics said.
Jackson also said: "As for our expectation from the central bank meeting, it seems that higher interest rates are on the cards."
He said: "It's always difficult to predict movements in Turkish monetary policy, but our best guess is that it might involve a 100-300 basis point (1.0-3.0 percentage point) hike in the O/N (overnight) lending rate," he added.
"For now, though, we suspect that a hike in the O/N lending rate (perhaps to 9.0 percent) is the most likely outcome."
But other analysts called for more aggressive action to obtain results and bolster the bank's credibility.
"Time to hike aggressively," said Inan Demir, chief economist at Istanbul-based Finansbank.
"We think that any rate hike needs to be aggressive enough to push short term rates firmly into double digit territory," he said.