Turkey's Central Bank Aggressively Raises Rates A foreign exchange shop in Istanbul on Tuesday. Turkey's currency, the lira, has lost 14 percent of its value over the last two months. Gurcan Ozturk/Agence France-Presse - Getty Images FRANKFURT - Turkey's central bank aggressively raised rates late Tuesday, in a drastic move aimed at bolstering the currency. But it is unclear whether the move will be enough to satisfy international investors and repair the central bank's reputation. Turkey is facing increased political and economic pressure to take action. The Turkish lira has been among the most battered of developing-market currencies in recent weeks. After the central bank's decision, the lira strengthened in after-hours trading. "Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in the Turkish lira and a pronounced increase in the risk premium," the central bank said in a statement. The central bank will implement necessary measures at its disposal to contain the negative impact of these developments on inflation and macroeconomic stability. Turkey is battling a crisis of confidence in the global markets. Along with Argentina, Ukraine and Thailand, Turkey's domestic problems were more or less tolerated by international investors when the world was awash in cheap money. But now that the Federal Reserve has begun withdrawing its stimulus to the American economy, investors are taking a closer look and punishing countries like Turkey where there is both political turmoil and a monetary policy widely considered unsound by international economists. "Although the Fed triggered the sell-off, the underlying problems are homegrown, and investors are starting to pay more attention to these domestic problems," said Nicholas Spiro of Spiro Sovereign Strategy, a consulting firm. Turkey is a glaring example. The Central Bank of the Republic of Turkey said in a statement Monday that it would meet Tuesday evening, three weeks ahead of schedule, "to discuss recent developments and take the necessary policy measures for price stability." At the emergency meeting, the central bank increased a series of short-term interest rates. It increased the marginal funding rate, an overnight rate, to 12 percent, from 7.75 percent. The moves are intended to help country's currency. Higher interest rates tend to push up the value of the lira, by offering a greater return on investments denominated in the Turkish currency. Ahead of the central bank meeting, Turkey's currency, the lira, rose more than 1 percent against the United States dollar to about 44 cents on Tuesday. In the previous two months, it had lost about 14 percent of its value, hitting a record low Monday. A weak lira raises the cost of imported goods, like oil for Turkish corporations, pushing up inflation and hurting growth. "We buy fabric and yarn in U.S. dollars, so our prices went up dramatically on a daily basis in recent weeks," said Zeynep Demir, 21, a textile worker. In February, we were supposed to have a raise, but now I think of ways to cut down my expenses. Monetary policy in Turkey is highly politicized. Prime Minister Recep Tayyip Erdogan is in the middle of a corruption scandal and faces increasing criticism both at home and abroad for his attempt to curb press freedoms and enact other authoritarian policies. Mr. Erdogan has spoken darkly of a foreign interest rate lobby that he accuses of being determined to push up rates and stifle growth. Hours before the emergency meeting on Tuesday, Mr. Erdogan reaffirmed his opposition to any increase in interest rates. "I'm against increasing interest rates today as always, but have no jurisdiction over the central bank," Mr. Erdogan said in a televised statement. But Mr. Spiro said investors would not be satisfied unless the central bank, which is perceived as being susceptible to pressure from Mr. Erdogan, promised to continue raising interest rates as much as needed to defend the lira's value. "Markets want a firm commitment to mount a proper interest rate defense of the lira come what may," Mr. Spiro said. But, he said, "this is not a central bank prepared to give the market everything it wants." Since the middle of last year, when the Federal Reserve sent tremors through international financial markets by announcing that it would pull back from its bond-buying program, Turkey has become a charter member of the "fragile five" - the finance industry's recently minted nickname for emerging economies with vulnerable currencies. Other countries in this club include Brazil, South Africa, Indonesia and India. Such countries are highly dependent on skittish foreign investors to finance their growth ambitions. The Fed's plans, which portended higher interest rates in the United States, made dollar-denominated debt seem more attractive compared with the higher-yield, higher-risk debt of the fragile five. None of those other emerging markets, though, are as dependent as Turkey is on short-term dollar borrowing - which, unlike longer-term loans, can be quickly pulled by nervous lenders. According to economists at Barclays in London, Turkey must borrow more than $200 billion this year from abroad, the equivalent of about 25 percent of its economic output, with the bulk of that money coming from corporations and banks. If those credit lines are cut, Turkey will run out of cash and will most likely need to seek a bailout from the International Monetary Fund. Although foreign investors demand high yields on their money to put it in fragile economies like Turkey's, the Turkish central bank has been under pressure to keep interest rates artificially low - effectively they are around 8 percent, which is high by Western standards but in Turkey is about the level of inflation - to keep the economy growing in a year of crucial local elections. The Turkish economy grew an estimated 4.3 percent last year, according to the World Bank, up from 2.2 percent in 2012. But there was concern about inflation, which the International Monetary Fund estimated would average 8 percent in 2013. Now, Investors are skittish. According to figures from the Institute of International Finance, a trade group for the global banking industry, since last May foreign investors sold $3.9 billion more of bonds denominated in Turkish lira than they have purchased. For a seven-month period, that is an unusually large net outflow of foreign money. It highlights the extent to which many foreign lenders, who have played a significant role in financing the country's growth, have changed their view on Turkey, since the political protests in Istanbul last spring. So far, unlike its fellow "fragile five" members, Turkey has been fairly passive in defending the lira. But now the bank is under pressure to act. "They need to raise rates above inflation," said Michael Harris, an investment analyst at Merrill Lynch in London who focuses on Turkey and other countries in emerging Europe and the Middle East. If the bank is able to convince the market that it is serious about defending the lira, Mr. Harris said, there is no reason the lira cannot "remain a store of value" for local and foreign investors. Still, skeptics point out that the while the country's foreign currency reserves seem sizable enough at over $100 billion, such a store can run down very quickly if Turkish deposit holders and corporations join foreign investors and exchange their liras for dollars. "The big risk here is that households will move from the lira to the dollar," said Sebnem Kalemli-Ozcan, a Turkish economist at the University of Maryland who studies the impact of financial crises in emerging-market economies. That will really put pressure on the currency. Mr. Erdogan may be willing to accept some increases in official interest rates to contain inflation. But the question is whether it will be enough to reassure investors that the central bank is committed to supporting the lira, other analysts said. On Tuesday, the central bank said it would remain vigilant, saying any new data or information may prompt it to rethink its position. In particular, inflation remained a concern. "Tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook," the central bank said in a statement. Under this policy stance, inflation is expected to reach the 5 percent target by mid-2015.