Turkey surprises with huge interest rate hike

Istanbul: Turkey’s central bank on Thursday delivered a huge surprise by raising the interest rate to 25 per cent.

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

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

The lira gained 1.5 per cent against the dollar following the bank’s strong signal that is was stepping up its fight against inflation.

Large gap

The central bank increased its key rate to 15 per cent from 8.5 per cent 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 per cent in between April and June of next year.

Turkey’s annual inflation rate ticked up to 47.8 per cent 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.