Turkish Central Bank hikes policy rate to 25%, sparking market surge

Turkish Central Bank hikes policy rate to 25%, sparking market surge
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Turkey's central bank unexpectedly raised interest rates to combat near 50% inflation, causing the Turkish lira to surge and markets to rise, as the move reflects a shift towards more orthodox economic policies

Turkey’s central bank on Thursday raised interest rates far more than expected, signaling a shift towards more aggressive measures to combat soaring inflation rates nearing 50%. The unexpected decision has led to a surge in the value of the Turkish lira.

The Monetary Policy Committee, under Governor Hafize Gaye Erkan, raised the rate to 25% from 17.5% and far above survey expectations. Most economists polled by Bloomberg predicted a hike to 20%.

The immediate impact of the decision was evident in the financial markets, as Turkish assets experienced a notable uptick. The Turkish lira, which had previously been on a downward trajectory, managed to reverse its losses and gained over 2% against the US dollar. This increase marked the currency's most significant rise in over a year. Furthermore, the cost of insuring Turkish debt against default over a five-year period dropped to below 400 basis points. This positive momentum extended to bank shares as well, with the Borsa Istanbul Banks Index witnessing a substantial climb of nearly 6%.

In a statement issued by the MPC, the committee emphasized its commitment to continuing the process of monetary tightening. The goal is to establish a trajectory of disinflation, anchor inflation expectations, and regain control over pricing behavior. Despite this move, the interest rate remains notably below the level of price growth in Turkey, even though this marks the third consecutive rate hike since President Recep Tayyip Erdogan secured his reelection in May.

During his campaign, Erdogan had promised a shift towards more orthodox economic policies, a promise that has gained traction due to the flight of foreign investors from the Turkish economy in recent years.