Turkish Prime Minister Recep Tayyip Erdogan called on the Central Bank on April 4 to cut interest rates. Erdogan had made a similar demand some four months ago, while alleging the existence of an “interest rate lobby,” but his wish never materialized. To the contrary, the Central Bank was forced to announce massive hikes of 4 to 5.5 base points in overnight borrowing and one-week repo rates. The bank raised the rates after the Turkish lira fell sharply against the dollar, hit by corruption allegations, the threat of political chaos ahead of elections and a move by the US Federal Reserve to put the brakes on bond buying. Foreign investors began exiting the Turkish market, lured back to the United States by rising interest rates. Erdogan reacted by asserting that he would “tolerate this for some time.” 

The record hike calmed financial markets to a certain extent, with the lira rebounding from about 2.3 to 2.17 against the dollar. Lingering tensions ahead of the March 30 local elections then led to the lira fluctuating back in the 2.21-to-2.25 range. The yields on bank deposits, meanwhile, rose from 7-8% to 11%.

The election results showed that the ruling Justice and Development Party (AKP) remains strong, so the markets were quickly lured by the prospect of continued political stability. The lira regained more ground, reaching 2.09 against the greenback.

The main 100 Index of the Istanbul stock exchange shot up from 64,000 to 74,000 points. In January alone, foreign investors had sold more than $400 million worth of shares, compared to $429 million for all of last year. In February and March, however, the tide turned, with total net buying of $885 million, and the index rallied. Investors' appetite appeared to persist into the first week of April.