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.

They immediately set off on a new battle against inflation that peaked at an annual rate of 85 percent last October and is on the rise once again.The team allowed the lira to start depreciating against the dollar in a bid to ease pressure on depleted state coffers.The team allowed the lira to start depreciating against the dollar in a bid to ease pressure on depleted state coffers.