Turkey’s central bank signalled a possible interest rate increase on Monday after the lira hit another low, despite long-running government opposition to such a move.

The central bank said it would hold an extraordinary meeting on Tuesday after the currency neared TL2.39 to the dollar on Monday, an all-time low that represents a roughly 10 per cent fall from the start of the year.

Amid expectations that an interest rate increase will result from the meeting, whose result is scheduled to be announced at midnight on Tuesday local time (10pm GMT), the currency immediately rebounded to about TL2.33.50.

Analysts said the move followed the failure of the bank’s previous attempts to stabilise the currency without increasing benchmark rates. These included plans last week to increase rates on “extraordinary days” – of which Monday is the first – from 7.75 per cent to 9 per cent, and an estimated $3bn intervention in the market.

Turkey’s Islamist-rooted government has repeatedly made clear its opposition to any increase in interest rates in what is a sensitive election year. Recep Tayyip Erdogan, Turkey’s prime minister, has repeatedly inveighed against what he dubs an “interest rate lobby” that is supposedly trying to hold back the country’s growth.

However, the country’s $60bn current account deficit – which is 80 per cent financed by short-term funds – and its limited net reserves, which are estimated at less than $38bn, and continuing political turbulence have all affected investor confidence.

Last week, in comments that Mr Erdogan labelled “treason”, Muharrem Yilmaz, head of Turkey’s biggest business confederation, said that no foreign investment would come to a country where the rule of law was in doubt. The independence of institutions such as the central bank has also come under the spotlight.

“It’s obvious that there is a clear preference in the political establishment in Turkey not to see rate hikes,” said Reinhard Cluse at UBS. “I am puzzled from a political perspective in which higher interest rates seems unacceptable, when the alternative is a weaker exchange rate, higher bond yields, and higher inflation.”

Copyright The Financial Times Limited 2018. All rights reserved.