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| - Turkey's central bank raised Thursday its main interest rate for the first time in two years to haul the lira up from historic lows. Investors were cheered by the hike of the bank's one-week repo rate from 8.25 percent to 10.25 percent because it also demonstrated the bank's independence in the face of President Recep Tayyip Erdogan's firm opposition to higher rates. It was the first hike since September 2018 and followed nine cuts from a rate of 24 percent in July 2019. The lira gained around one percent in value against the dollar within minutes of the announcement, after touching a record low of 7.71 to the dollar earlier in the day. "Massive surprise, and positive," remarked Timothy Ash, an analyst at BlueBay Asset Management. Capital Economics said the decision "should help to restore the bank's battered credibility". Turkey has been burning through its foreign currency reserves to support the lira, which has lost 22 percent of its value against the dollar this year and is one of the world's worst performing emerging market currencies. The Moody's ratings agency estimated Monday that Turkey's currency reserves were now at a 20-year low. It downgraded Ankara's sovereign credit rating further into junk status at B2 -- the same level as nations such as Bolivia and Egypt. "The government has almost depleted the buffers that would allow it (to) stave off a potential balance-of-payments crisis," Moody's warned. A central bank statement said Thursday that it had "decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability". Inflation edged up to 11.77 percent in August and has remained stubbornly above 10 percent for the past few years. This means that Turkish bank deposits and bonds lose value over time, pushing investors out of the market and forcing Turkish nationals to convert their liras into dollars or euros. The bank last increased its main rate to 24 percent in September 2018 owing to a currency crisis caused by tense relations with the United States. Erdogan rejects conventional economic theory however, and believes higher rates cause inflation. He once called high rates "the mother and father of all evil", and urged they be cut to stimulate growth. Erdogan sacked the bank's governor last year and appointed Murat Uysal, under whose direction the rate has been progressively cut. Ash said Thursday's increase "suggests the (bank) listened to the market and decided they had to move to avoid a disorderly devaluation and potential balance of payments crisis". "They are not out of the woods yet, but they have given themselves a fighting chance." raz/zak/wai
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