ISTANBUL: Turkiye’s central bank on Thursday delivered a huge surprise by raising the interest rate to 25 per cent as part of a transition from President Recep Tayyip Erdogan’s era of unorthodox economics.

The hike of 750 basis points follows a raise to 17.5pc from 15pc last month. Most economists had expected the bank to increase it policy rate Thursday to 20pc.

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

The lira gained 1.5pc 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 Turkiye’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 85pc 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 Turkiye’s foreign investors.

The central bank increased its key rate to 15pc from 8.5pc 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.

Published in Dawn, August 25th, 2023