Turkey makes bigger than expected interest rate hike, targets inflation

Turkey’s central bank on Thursday raised the interest rate to 25 percent in a surprise move that signals a continued move away from previous policy, which focused on keeping interest rates low.

The hike of 7.5 percentage points follows a raise to 17.5 percent from 15 percent last month.Most economists had expected the bank to increase its policy rate Thursday to just 20 percent.

“Recent indicators point to a continued increase in the underlying trend of inflation,” the central bank said.

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” it said.

The Turkish lira gained 1.5 percent against the dollar after the bank’s clear signal that it was stepping up its fight against inflation and attempts to support the troubled currency.

Capital Economics analyst Liam Peach said that the rate increase was “much larger-than-expected” and “will go a long way towards reassuring investors that the shift back to policy orthodoxy is on track”.

Many economists disagreed with Turkish President Recep Tayyip Erdogan’s previous monetary policy, which was regarded as unorthodox.

However, Erdogan infused his government with market-friendly faces after winning a difficult May election that came in the heat of one of Turkey’s most dire economic crises in decades.A new national approach to economics
The central bank increased its key rate to 15 percent from 8.5 percent at the first meeting chaired by former Wall Street executive Hafize Gaye Erkan in June.

Erdogan had pushed the nominally independent institution to slash borrowing costs out of a lifelong belief that high-interest rates cause, rather than cure, inflation.

But Erkan and Finance Minister Mehmet Simsek, a former deputy prime minister who returned to the cabinet in June, had advocated a more go-slow approach in the past two months that tried to restore market confidence without causing too much short-term pain.

That appeared to change when July’s annual inflation rate soared back to 47.8 percent thanks to billions of dollars in social spending Erdogan meted out during his election campaign.