Turkey raises rates again amid mounting fears of crisis

Turkey raised interest rates yesterday for the third time this month in a renewed bid to bolster its currency and stem inflation amid mounting fears of financial crisis across emerging markets.

The central bank, under its Governor Durmus Yilmaz, raised the overnight lending rate by 2 percentage points to 22.25 per cent, meaning it has raised rates 6 percentage points this month.

The bank is struggling desperately to support the currency, which has fallen 20 per cent in the past eight weeks, and to tackle a surge in inflation to 10 per cent. Analysts fear that if it fails, it could turn into a full-blown currency crisis that could spread to countries as far flung as India and Poland.

Analysts warned an unexpectedly large rise in US interest rates or tough language from the Federal Reserve today could trigger a massive stock market sell-off. Stephen Lewis, the chief economist at Insinger de Beaufort bank in London, said: "The Turkish economy looks like being a major casualty of the central banks' concerted withdrawal of liquidity from global markets."

He said while yesterday's move was successful in propping up the currency, which rose 1.6 per cent, higher rates could knock the economy and further undermine the lira - prompting fresh rises.

"The end of the process would have to be something on the lines of what we saw in [the Asian crisis of] 1997 and 1998 when the International Monetary Fund had to go in and impose tough policies," he said. But he warned that would meet resistance from the newly empowered Islamist groups in the country. "The momentum is negative with no sign a of brake on Turkey's slide [and] the implications for Mid-East stability are serious."

Graham Turner, at analysts GFC Economics, said: "Should the Fed deliver the wrong verdict for emerging markets, there is a risk investors will look beyond the obvious candidates - Slovakia and India are causing concern. Columbia, Mexico and Poland are suffering."