* Central bank emergency policy meeting set for Jan 28
* Seen hiking lending rate by 225 bps - poll
* Erdogan has been vehemently opposed to higher rates
* Bank to issue midnight statement after meeting
* Lira hits record low of 2.39, rebounds after announcement
(Recasts with Reuters poll)
By Seda Sezer and Nevzat Devranoglu
ISTANBUL, Jan 27 Turkey's central bank is
expected to ignore political pressures and hike its lending rate
to around 10 percent at an emergency meeting on Tuesday, though
it was unclear whether it would be enough to stem a slide in the
Prime Minister Tayyip Erdogan, keen to maintain economic
growth ahead of an election cycle starting in two months, has
been a vociferous opponent of higher borrowing costs, railing
against what he describes as an 'interest rate lobby' of
speculators seeking to stifle growth and undermine the economy.
That has left the central bank struggling to contain the
lira's precipitous slide as a corruption scandal shaking the
government and fears about a power struggle and the impact of a
cut in U.S. monetary stimulus shake investor confidence.
The central bank is expected to raise its overnight lending
rate by 225 basis points to 10 percent on Tuesday at its first
extraordinary monetary policy meeting since August 2011, at the
height of the euro zone debt crisis, according to the median
forecast in a Reuters poll of 31 economists.
Thirty of those polled from a wide sample of Turkish and
international banks forecast a hike, with estimates ranging from
a rise of 125 basis points to 425. Only one forecast the bank
would leave rates unchanged. Replies were anonymous.
There was less consensus over whether such a move would be
enough to stabilise a tumbling lira and rising inflation, with
only 12 economists saying yes and seven saying no, citing the
need for structural reforms and political stability.
The graft scandal, which triggered the resignation of three
ministers and detention of businessmen close to Erdogan, has
grown into one of the biggest challenges of his 11-year rule.
His reaction, purging the police force of thousands of
officers and seeking tighter government control over courts, has
drawn criticism from the EU and raised investor concern over the
rule of law and independence of state institutions.
"Since the corruption scandal started we haven't heard any
constructive comments from Erdogan," said Piotr Matys, an
emerging markets economist at 4Cast in London.
"If he starts making some sort of constructive comments then
that will ease concerns about Turkey and that will definitely
help ... But concerns about Turkish politics will not evaporate
in the short-term."
BURNING THE MIDNIGHT OIL
The lira's dive means Turks now need more than twice as many
lira to buy dollars as they did at the currency's peak six years
ago, a stark fall in a land heavily dependent on imports.
It has also badly exposed Turkish firms with foreign debts,
forcing them to scrap some investments, and has dented profits
made by foreign companies in Turkey.
The lira edged back from record lows after the central bank
announced its emergency policy meeting earlier on Monday,
raising market hopes for a decisive rate hike.
The lira tumbled to 2.39 to the dollar in early
trade but pulled back to above 2.3 after the bank said it would
meet "to take necessary policy measures for price stability".
The bank said it would issue a statement on the outcome at
midnight (2200 GMT) on Tuesday.
Fearful up to now of an outright rate hike, it has been
struggling to defend the lira instead by burning through its
forex reserves and trying to squeeze up borrowing costs on the
margins - a battle it has clearly been losing.
"We think they are close to throwing in the towel," said
Luis Costa, head of CEEMEA strategy at Citi, citing political
pressure as the likely reason the bank had been slow to react.
"They probably made sure a more aggressive reaction is
sanctioned by Erdogan."
Turkey's yield curve was inverted, suggesting that markets
expected significant tightening. The yield on the 10-year
benchmark bond rose to 11.02 percent from 10.44
percent on Friday, while the 2-year bond rose
to 11.14 percent from 10.99 percent.
The bank kept its main rates on hold at its latest policy
meeting last week - drawing public praise from Erdogan - but
said it would fund the market at 9 percent on "additional
tightening" days, when it does not hold repos and sells dollars
It also intervened directly last Thursday, selling some $3
billion in its first direct intervention in the forex market for
two years. But the lira continued to tumble.
"They need to deliver something in the order of a 200 basis
point hike for any material stabilisation," said Lars
Christensen, head of emerging market research at Danske Bank.
"But the growth implications of that will be pretty negative
and I don't think they will sacrifice growth in the long run."
Both the government and central bank officials reject the
notion that the central bank is anything other than independent.
But the new economy minister Nihat Zeybekci, appointed in a
cabinet reshuffle last month, came out a day before last week's
rate decision to underline the government's position, saying
that the lira's weakness posed no threat, even if it fell to
2.35 or 2.40 to the dollar.
The lira's dive has badly exposed Turkish firms with foreign
debts, forcing them to scrap some investments, and has dented
profits made by foreign firms in Turkey.
(Additional reporting by Deepti Govind and Dasha Afanasieva;
Polling by Ishaan Gera and Sarbani Haldar in Bangalore and
Nevzat Devranoglu in Istanbul; Writing by Nick Tattersall;
editing by Ralph Boulton)