At an emergency monetary policy committee meeting on Tuesday, the Central Bank of Turkey raised its interest rates between 425 bps and 550bps. The Bank increased the upper end of the interest rate corridor (marginal funding rate) to 12% from 7.75%, overnight borrowing rate to 8% from 3.5%, one-week repo rate to 10% from 4.5%. The bank also raised the interest rate on borrowing facilities provided for primary dealers via repo transactions from 6.75% to 11.5%. The Central Bank delivered more than expected and decided to simplify its complex operations. An earlier Reuters poll of economists showed that the Central Bank was expected to raise its overnight lending rate by 225 basis points to 10% from 7.75%. Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in TRY and a pronounced increase in the risk premium, the Bank said in a statement posted on its website following the emergency meeting. The Bank will implement necessary measures at its disposal to contain the negative impact of these developments on inflation and macroeconomic stability and it decided to implement a strong monetary tightening. The Central Bank liquidity will be provided primarily from one-week repo rate instead of the marginal funding rate in the forthcoming period, the Bank said. Tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook, the Bank underlined. The government targets a GDP growth rate of 4% this year when it faces crucial elections (local elections in March and presidential election in August) and the rate hike will make it difficult to achieve this target. PM Recep Tayyip Erdogan has long opposed to a rate hike, he has blamed what he calls "an interest rate lobby" for the anti-government protests last summer and a recent graft probe targeting the sons of cabinet ministers and businessmen close to Erdogan. On Tuesday, hours before the Central Bank's emergency meeting PM Erdogan reiterated that he was against increasing interest rates, saying that they (referring to the Central Bank ) would be responsible and would be held accountable for anything that could arise in the future. Apparently Erdogan tried to distance himself from an interest rate hike decision as it would be politically difficult for him to stand behind such a decision because of his much-publicised "anti-interest rate lobby" rhetoric.
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