Turkey Surprises With Huge Interest Rate Hike

Turkey's central bank on Thursday delivered a huge surprise by raising the interest rate to 25 percent as part of a transition from President Recep Tayyip Erdogan's era of unorthodox economics.

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 it policy rate Thursday to 20 percent.

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

The lira gained 1.5 percent against the dollar following the bank's strong signal that is was stepping up its fight against inflation and attempts to support the troubled currency.

Erdogan infused his government with market-friendly economists after winning a difficult May election that came in the heat of one of Turkey's most dire cost-of-living 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.

They allowed the lira to start depreciating against the dollar in a bid to ease pressure on depleted state coffers.

They also imposed a series of more technical steps aimed at balancing the economy and restoring the trust of both consumers and Turkey's foreign investors.

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.

But Erkan and Finance Minister Mehmet Simsek had since advocated a more go-slow approach that tries to restore market confidence without causing too much short-term pain.

"In addition to this gradual move to a more orthodox approach, the (central bank) appears to be prioritising reserve building and improvement in external imbalances," ING bank's chief economist Muhammet Mercan said.

The central bank expects the annual inflation rate to peak at 60 percent in between April and June of next year.

Turkey's annual inflation rate ticked up to 47.8 percent in July thanks in part to billions of dollars in social spending Erdogan meted out during his election campaign.

"There remains a large gap between the policy rate and both current and expected inflation," Mercan wrote.

Some analysts suspected that Erkan and Simsek feared a revolt from Erdogan should they push their reforms too strongly.

Erdogan fired one central banker four months into his attempts to interest raise rates in late 2020 and early 2021.

He dismissed two others before then for fighting his unorthodox approach.