Turkey's central bank is to hold a crisis meeting over its severely weakened lira late Tuesday, but Prime Minister Recep Tayyip Erdogan has flagged his opposition to the rate rise it is expected to announce.
His remarks, made a few hours before what analysts said would be the make-or-break meeting, raised the possibility of friction between the government and the central bank if it increases rates, as the bank has hinted it would do.
The central bank said it was ready to tighten monetary policy in a "lasting way".
"Nobody should have any hesitation that the central bank will use all available tools," the bank's governor Erdem Basci told a press conference.
"The bank will not hesitate to take steps to make lasting tightening in monetary policy if deemed necessary," he said.
Erdogan's government however wants rates held down to sustain growth ahead of an election cycle beginning with March local polls.
"I am opposed to interest rate increases now as I always have been," Erdogan said shortly before the bank's meeting.
"But I don't have any authority to interfere in the central bank," he said, adding that he hoped the bank would make a "right decision".
Until now, the bank has avoided a sharp rise in the base rate, using a big increase in the overnight rate -- held at 7.75 percent last week -- and intervening heavily on the foreign exchange market.
Some analysts estimated in July last year, when the bank began intervention, that it had about $46 billion dollars (34 billion euros) available but since then it has spent heavily, using up $4 billion in the last few days alone.
And those costly measures have failed to protect the lira.
The Turkish currency has been hitting record lows almost daily and has lost about 10 percent since mid-December, when a corruption scandal roiling key Erdogan allies became public.
The central bank gave an insight into the cost, saying: "A steep decline in forex reserves may cause other concerns, thus the interest rate weapon should be put into use in this environment."
Although the lira is the focus of attention, Basci said that the purpose of the meeting was to "ensure price stability".
The bank is expected to raise its overnight rate to at least 9.0 percent.
But Erdogan early Tuesday played down tensions over the darkened economic outlook.
"The Turkish economy is quite robust and it is pressing ahead in a resilient way," he told his ruling party lawmakers in the parliament.
Indeed, the currencies of other emerging markets are also taking a beating now.
Part of the cause is the US Federal Reserve's decision to reduce its stimulus measures, which curbs the attractivity of emerging markets that had offered higher returns.
The Fed tapering "hits countries that tend to fund their deficits with short term money flows like Turkey," said Kathleen Brooks, research director at Forex.com.
Brooks listed Turkey among those countries with shaky economic fundamentals, particularly current account deficits, along with India, Indonesia, South Africa and Thailand.
The expectations of an increase in Turkey's base rates have by themselves provided some support for the lira. The currency recovered to 2.25 at Tuesday's close, after hitting an all-time low of 2.39 on Monday.
The main Istanbul stock index, which has lost about 20 percent of its value over the past year, lost 1.59 percent to 63,543.70 points.
Higher interest rates 'on the cards'
The central bank raised sharply its inflation forecast for 2014 to 6.6 percent from 5.3 percent.
The bank predicted that inflation would slow from the second half of 2014, but analysts said it was likely to remain high this year.
"Core (Frankfurt: LJ1.F - news) inflation in Turkey is high and, with tax hikes and the weaker lira, inflation is likely to remain persistently high this year," economist William Jackson at the London-based Capital Economics told AFP.
Jackson also said: "As for our expectation from the central bank meeting, it seems that higher interest rates are on the cards."
He said: "It's always difficult to predict movements in Turkish monetary policy, but our best guess is that it might involve a 100-300 basis point (1.0-3.0 percentage point) hike in the O/N (overnight) lending rate".
"For now, though, we suspect that a hike in the O/N lending rate -- perhaps to 9.0 percent -- is the most likely outcome."
Neil Shearing, chief emerging markets economist at Capital Economist, also said the meeting had to result in a substantial tightening of policy.
"Restoring the one-week repo rate as the key monetary policy tool, and then hiking it from 4.5 percent to 10 percent would be a good start," he said.
"Tightening policy via reserve requirements or the operation of the late liquidity window would strengthen the impression that the CBRT (central bank) is fiddling around the edges and bowing to government pressure to at least appear to keep interest rates low," he added.
"In many respects, this is a make or break meeting for the bank".