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Turkey raises key interest rate

January 29, 2014

Turkey’s central bank has aggressively raised its key interest rate in a bid to stave off inflation and support the country’s currency. The lira has been suffering in the midst of a government corruption scandal.

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The central bank sharply raised its key interest rate to 12 percent from 7.75 percent on Tuesday at an emergency meeting after the lira hit a record low.

"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 bank said in a statement posted on its website at midnight.

"The central Bank will implement necessary measures at its disposal to contain the negative impact of these developments on inflation and macroeconomic stability," it said.

The bank said the country's inflation rate reached 7.4 percent in December and its aim is to lower it to a 5 percent target by mid-2015.

Following the shock decision, the lira picked up to 2.17 against the dollar from 2.25.

In addition to raising its overnight lending rate to 12 percent, it raised the rate on one week borrowing to 10 percent from 4.5 percent.

Neil Shearing, an economist at the London-based Capital Economics, said the rate boost is "clearly good news," and should help restore credibility to the central bank's goal of reducing inflation and stabilizing its markets.

The announcement comes as the lira had been dropping amid a corruption scandal that risks destabilizing Prime Minister Recep Tayyip Erdogan's government.

Ahead of the announcement Erdogan told reporters in Ankara, "I am opposed to interest rate increases now as I always have been," adding that he hoped the bank would make the "right decision.”

hc/ccp (AP, AFP, dpa)