By Orhan Coskun
ANKARA (Reuters) - Turkey ruled out capital controls on Thursday as it battles to defend the lira and tame inflation, leaving investors guessing as to what an "out of the ordinary" economic package touted by Prime Minister Tayyip Erdogan might involve.
Finance Minister Mehmet Simsek said there was no question of restrictions on capital movements after an emergency interest rate hike late on Tuesday failed to lift the lira currency substantially off record lows.
Erdogan, battling a corruption investigation shaking his government months ahead of elections, was quoted late on Wednesday as saying work on "a Plan B or a Plan C" for the economy may be announced in the coming days or weeks.
He is committed to maintaining growth as Turks prepare to vote and has railed against what he describes as an "interest rate lobby" of speculators seeking to push up rates and stifle Turkey's economic progress.
"We want it to be something out of the ordinary. Globally there are practices," he said of the plans, without elaborating, according to the pro-government Yeni Safak newspaper.
Yigit Bulut, a former TV commentator appointed by Erdogan as his economic adviser last July and best known in Turkey for suggesting the prime minister's enemies were seeking to kill him by telekinesis, sought to reassure investors.
"If a prime minister who has produced the brightest economic developments in the history of the republic says 'I'm conducting work, there are examples globally' it is indisputable that this is very positive work for markets," he said on Twitter.
The central bank raised all its key interest rates by around 500 basis points on Tuesday, ignoring opposition from Erdogan and stunning investors with the scale of the move, initially sending the lira up sharply and triggering a broader revival in appetite for battered emerging markets.
But the rout resumed on Thursday, with the U.S. Federal Reserve's decision to withdraw more of its monetary stimulus and weak Chinese data restoring the risk-averse mood.
The lira was trading slightly weaker at 2.2560 by 1400 GMT from 2.2471 late on Wednesday.
Turkey's central bank said it had tried to "front-load" its monetary tightening with this week's rate hike but said it may tighten liquidity further if needed, according to the minutes from Tuesday's meeting, published on its website.
Turks appear to be betting against it.
Foreign portfolio outflows have remained relatively steady in recent weeks, suggesting much of the strong dollar demand is coming from Turkish firms and households, stocking up on hard currency as a potentially turbulent election period approaches.
A corruption scandal has blown into an all-out feud between Erdogan and influential U.S.-based Muslim cleric Fethullah Gulen, a former ally whom the prime minister's supporters view as orchestrating the investigation as a plot to unseat him.
The saga has damaged the reputation of both, with Erdogan's approval ratings at their lowest in years, though his Islamist-rooted AK Party would still win an election if one were called this weekend, a survey showed on Thursday.
Erdogan has overseen strong economic growth since coming to power in 2002, transforming Turkey's reputation after a series of unstable coalition governments in the 1990s ran into repeated balance of payments problems and economic crises.
A sharp downturn would tarnish the reputation for strong financial management on which much of his popular support is built and could further damage him at the polls.
Some analysts suggested his comments on Wednesday may have been little more than an attempt to reassert himself in the eyes of voters, showing himself as in control of an increasingly fragile economy, after a rate hike he had vocally opposed.
"I think there's a political motivation behind his comments ... and they were a message to his grassroots," said Umit Ozlale, an economics professor at Istanbul's Ozyegin University who advised the central bank for almost 10 years.
Erdogan repeated his belief on Wednesday that higher interest rates lead to higher inflation, a logic dismissed by most economists.
"When inflation comes out higher than targeted at year-end despite the interest rate hikes, he will turn and say 'look I told you rate hikes create inflation'," Ozlale said.
"Otherwise there is no economic rationale for such a statement in the current circumstances."
(Additional reporting by Asli Kandemir in Istanbul; Writing by Nick Tattersall Editing by Jeremy Gaunt)