ANKARA, June 26: The Turkish lira stemmed recent sharp losses on Monday after the central bank raised its key interest rate for the second time in a month and auctioned off dollars to shore up the currency, which has been hit by inflation worries.

The lira, which has lost about 23.5 per cent of its value since May amid a global flight from emerging markets, began the day at 1.67 to the dollar, down from Friday's close of 1.70, after the central bank decided on Sunday to raise its key overnight borrowing rate by 225 base points from 15 to 17.25 per cent.

As the lira weakened later in the day, the central bank first held an auction of dollars worth $500 million, then sold dollars on the foreign exchange market.

The volume of the transaction was not immediately known but market analysts estimated the central bank had sold between $500 to $800 million (400 to 640 million euros) from its reserves.

After the intervention, the lira eased to 1.65 to the dollar.

“The central bank has seen that the exit of capital from Turkish markets is quite permanent and has moved to respond accordingly,” Haluk Burumcekci, research head at Fortis Bank, said.

“This will inevitably lead to a loss in (the central bank's) foreign exchange reserves but it will help stabilise the currency,” he said.

Yields on the bond market rose, with interest rate on the benchmark April 9, 2008 bond climbing to 22.8 per cent from Friday's close of 20.5 per cent.

“Investors remain cautious and are waiting to see the long-term impact of the central bank's decision to raise its key rate and sell off dollars,” an analyst at Oyak bank said, speaking on condition of anonymity.

“There is no easing in the bond market because the currency slide is not completely under control yet,” she added.

The national index of the Istanbul stock exchange lost 1,181.7 points, or 3.57 per cent, to close the day at 31,950.5 points, its lowest level of the year, compared to Friday's close of 33,132.3 points.

Turkish markets have been in turmoil since May as foreign investors have grown nervous amid a global sell-off in emerging markets, political friction at home and higher-than-expected inflation figures.—AFP