By Seda Sezer and Daren Butler
ISTANBUL, Jan 29 (Reuters) - Turkey's central bank hiked all of its main interest rates in dramatic fashion at an emergency policy meeting, ignoring opposition from Prime Minister Tayyip Erdogan as it battles to defend a crumbling lira.
The bank raised its overnight lending rate to 12 percent from 7.75 percent, its one-week repo rate to 10 percent from 4.5, and its overnight borrowing rate to 8 percent from 3.5, much sharper moves than economists had forecast.
The lira strengthened to 2.18 against the dollar after the decision from 2.25 late on Tuesday, having hit a record low of 2.3900 early on Monday.
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.
"I would like you to know that as always, I am against a hike in interest rates today," Erdogan told reporters late on Tuesday, hours before the bank's emergency meeting, adding:
"But of course I don't have the authority to interfere with the central bank ... the responsibility belongs to them."
The central bank had been struggling to contain the lira's precipitous slide, with investor confidence damaged by a corruption scandal shaking the government and the global impact of a cut in U.S. monetary stimulus.
Reluctant until now to make an outright rate hike, the central bank has instead tried to defend the currency by burning through forex reserves and trying to squeeze up borrowing costs on the margins - a battle it had clearly been losing and one which it has now decisively abandoned.
In a statement, the bank said it would maintain tight monetary policy until the inflation outlook showed a clear improvement.
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 years at the helm, just as he prepares for local elections in March and a presidential race he is expected to contest five months later.
His reaction, purging the police force of thousands of officers and seeking tighter control over the courts, has been criticised by the European Union and raised investor concern over the rule of law and independence of state institutions.
Turkey's problems have been exacerbated by a sharp global emerging selloff in recent days. In a sign of how closely investors are watching worldwide, U.S. stock futures rallied in late trade after the central bank's move, even though a policy decision is due from the Federal Reserve later on Wednesday.
"This is a bold move. It goes a long way toward illustrating to the market how committed they are to shoring up their currency," said Kathy Lien, managing director at BK Asset Management in New York.
"Taking such an aggressive measure restores confidence and also limits spillover effects in other markets."
A Reuters poll of 31 economists on Monday found a consensus pointing to a 2.25 point rise in the lending rate. Only one forecast a move this dramatic.
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