By Yeliz Candemir

ISTANBUL--Turkey's central bank Thursday raised interest rates for the first time in nearly three years, seeking to counter the economic reverberations of political upheaval at home and joining emerging-market peers in trying to stem a currency selloff after Donald Trump clinched the U.S. presidency earlier this month.

The bank's Monetary Policy Committee surprised observers by raising its benchmark one-week repo rate to 8% from 7.5% and the overnight lending rate to 8.5% from 8.25%--the first increases since January 2014. Policy makers held the overnight borrowing rate at 7.25%.

Ten out of 15 economists surveyed by The Wall Street Journal forecast that the benchmark one-week repo rate would be raised to 7.75%, while five had expected rates to be left on hold.

Turkey's lira has weakened significantly since a failed coup attempt in July that has rocked the country's political landscape and prompted credit-rating downgrades.

The currency has also slumped 8% against the dollar since Mr. Trump's surprise victory, in line with a broad selloff in emerging-market assets. Expectations that Mr. Trump will pour investment into U.S. infrastructure and that interest rates will rise have heightened the case for investors to keep their cash in American assets.

The rout in emerging markets has prompted swift action from some central banks. Mexico's central bank raised interest rates to counter a weaker peso. In Asia, Bank Indonesia has intervened directly in foreign-exchange markets and the Malaysian central bank took the unusual step of trying to clamp down on the offshore futures market to support the plunging ringgit.

"Currency weakness [in Turkey] has prompted policy makers to act now," said William Jackson, an emerging-markets economist at Capital Economics, who forecast further interest-rate increases next year.

After the decision was announced, the lira gained as much as 0.8% to 3.3689 against the dollar. The currency quickly reversed its gains to plunge more than 1.5% against the dollar, hitting a record low of 3.44 in afternoon trading. Turkey's main BIST 100 stock index reversed its gains and closed 1.1% lower, while the benchmark two-year government bond yield dropped to 10.81% from 10.95% at the close on Wednesday. Bond yields fall as prices rise.

The central bank's decision came as the European Parliament voted overwhelmingly to temporarily freeze talks on Turkey's bid to join the European Union on Thursday. Lawmakers were responding to measures that Turkish authorities have taken since July's failed coup, calling them disproportionately repressive.

The downward pressure on the currency intensified the day before the rate decision, with President Recep Tayyip Erdogan slamming interest rates as too high and calling on Turkish lenders to reduce them to "reasonable levels."

Mr. Erdogan also on Wednesday convened Turkey's Economic Coordination Board--the second meeting since Friday, when it said the central bank would take necessary steps in line with its price stability target.

Turkish policy makers reduced the overnight lending rate a total of 2.5 percentage points between March and October, capping borrowing costs for Turkish lenders in a move to underpin economic growth. The central bank halted its seven-month easing cycle in October because of the lira's slide.

"Exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook," the Turkish central bank said in a statement. "The committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behavior."

In a separate statement, the central bank said it cut foreign-currency reserve-requirement ratios by 0.5 percentage point for all maturities. The central bank said its move will provide approximately $1.5 billion of liquidity to the financial system.

Write to Yeliz Candemir at yeliz.candemir@wsj.com

(END) Dow Jones Newswires

November 24, 2016 10:55 ET (15:55 GMT)

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