Turkish rate hike success seen as test case for emerging markets TURKEY'S central bank has unveiled a series of aggressive interest rate increases, far exceeding market expectations and sending the lira roaring back after an extraordinary policy meeting billed as a test case for under-pressure emerging markets. The bank raised its overnight lending rate to 12 per cent from 7.75 per cent, raised its one-week repo rate to 10 per cent from 4.5 per cent and raised its overnight borrowing rate to 8 per cent from 3.5 per cent. The overnight lending in the late liquidity window - the highest rate charged to Turkish banks if they need to borrow just before local markets close - was also raised to 15 per cent from 10.25 per cent. The bank said in a statement it would simplify monetary policy, shifting its dazzling array of market rates in a move analysts said heralded a return to a more orthodox stance. The benchmark one-week repo rate would now be used as the bank's key funding rate for the market, replacing the overnight lending rate which determines the cost of loans from the bank to Turkish lenders and the overnight borrowing rate, which dictates what the bank pays for deposits. "We have decided to do a strong monetary tightening and simplify the operational framework to ensure price stability," the bank said in a statement. Within minutes of the announcement, the Turkish lira strengthened 3 per cent against the US dollar - a big move in foreign-exchange markets. That brings gains in the lira to almost 10 per cent since the currency hit a record low on Monday. In recent trade in New York, one dollar bought 2.1867, compared with 2.2522 late Monday, according to data provider CQG. Turkey's decisive move provided a boost to jittery markets concerned about the recent sell-off in emerging-nation currencies, bonds and stocks. The South African rand and the Russian rouble followed the lira higher. A months-long decline in emerging markets was sparked late last year by the first hints from the Federal Reserve that the US central bank would begin to withdraw its extraordinary post-financial crisis stimulus measures. Selling spread to developed nations last week, pushing the Dow Jones Industrial Average down more than 300 points on Friday. S&P 500 futures were recently trading 6.40 points, or 0.4 per cent, higher in the overnight trading session. The S&P 500 closed up 0.61 per cent in regular trading. The moves were much more hawkish than the expectations of eight economists polled by The Wall Street Journal, who unanimously forecast that the bank would raise its overnight lending rate by between two and three percentage points from the current level of 7.75 per cent to tighten liquidity and help strengthen the lira. Analysts said the Turkish move could prove a bellwether for other emerging markets trying to combat capital flight and rising inflation without crippling their economies by raising interest rates too high. If Turkey - suffering from a ballooning current-account deficit of 7 per cent of gross domestic product and fast-rising political risk - can regain the confidence of investors, it could have a cathartic effect on other vulnerable markets. They did it. They saved the day. This decision has stopped the domino effect on emerging markets. It's that big," said Benoit Anne, emerging markets analyst at Societe General. Turkey and other emerging markets are scrambling for relief after a month of hefty declines in their currencies, and the latest moves have fed expectations of a more concerted fightback. Leaders in Turkey and Argentina have already gone on the verbal offensive, accusing foreign media and business groups on Tuesday of seeking to exploit difficulties in the developing world. The Turkish move came hours after a surprise rate hike in India, as Delhi moved to dampen rising prices even as the South Asian giant faces its slowest growth in a decade. In South Africa, which faces a similar mix of weakening growth and high inflation, rate setters are under pressure to follow suit at their meeting on Wednesday. The central bank appeared to abandon its extraordinary day rate of 9 per cent - a rate introduced last week to enable additional daily monetary tightening in what analysts called a 'backdoor rate hike'. The Turkish lira had plummeted more than 11 per cent against the dollar since the beginning of January before rebounding some 5 per cent ahead of an expected rate rise on Tuesday. The central bank last week held all its rates steady in its regularly scheduled meeting, sending the currency to record lows against the dollar. On Thursday, the central bank intervened directly in the currency markets to stem the lira's decline, but the central bank's efforts remained ineffective. Turkish markets have been hit hard by the US Federal Reserve's tapering plans and by local political tensions. A corruption probe launched on December 17 has targeted Prime Minister Recep Tayyip Erdogan's allies, forced a cabinet shuffle, further fuelled the lira sell-off and sent borrowing costs surging. In October 2011, when the currency sank 20 per cent against the dollar to a then-record low, inflation hit double digits for the first time in three years, the central bank sharply raised overnight lending rate by 3.50 percentage points to 12.5 per cent. In June 2006, the central bank raised its policy rate by 2.25 percentage points.