ISTANBUL: Turkiye’s central bank aggressively lifted its key interest rate by 750 basis points to 25% on Thursday, far more than expected, sparking a lira rally as part of its post-election policy U-turn to address rebounding inflation.
The one-week repo rate has risen by 1,650 basis points since June.
The bank’s policy committee, including three members taking part for the first time and seen as having hawkish sway, repeated it is ready to tighten further as needed to cool inflation that soared to nearly 48% last month.
The lira - which had touched new all-time lows almost daily in recent weeks, including just before the policy decision - jumped more than 2% versus the dollar after the rate hike.
According to a Reuters poll, economists expected a median hike of 250 basis points, from 17.5% previously. Some had even expected a more dovish move given the bank undershot expectations in the last two months.
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Erdogan appointed former Wall Street banker Hafize Gaye Erkan to head the central bank in June after his May re-election, in the face of an economy strained by depleted FX reserves and soaring inflation expectations.
Erdogan’s past drive to slash rates sparked a currency crisis in late 2021 and sent inflation above 85% last year. Annual consumer prices are seen rising to around 60% by year end due partly to currency depreciation.
The currency is down nearly 70% in two years largely due to Erdogan’s previously outspoken opposition to high rates and influence over the central bank. It crashed again this summer as the new economic team in Ankara loosened the state’s grip on FX markets and began shedding unorthodox policies and regulations.
The central bank has also selectively tightened credit. At the weekend it began rolling back a costly scheme, adopted to halt the late-2021 currency crash, that protects lira deposits against forex depreciation.
The central bank was expected to lift rates to 25% by year end, according to the median in the Reuters poll conducted last week.