Türkiye raises policy interest rate by 750 basis points

The Turkish Central Bank has increased its policy interest rate by 750 basis points to 25 percent.

In a statement on Thursday, the bank said that its monetary policy committee decided to continue the monetary tightening process in order to establish the disinflation course “as soon as possible.”

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

"The strong course of domestic demand, cost pressures stemming from wages and exchange rates, the stickiness of services inflation and tax regulations have been the main drivers," it added.

"We are determined, price stability is our top priority," Türkiye's Treasury and Finance Minister Mehmet Simsek said on X, formerly Twitter.

'A surprise'

The fresh 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 by 2.5 percentage points to 20 percent.

Central Bank Governor Hafize Gaye Erkan, a former Wall Street executive, "impressed investors by raising the policy rate to 25 percent from 17.5 percent at today's meeting," commented Piotr Matys, senior FX analyst in Touch Capital Markets, London.

"This is significantly higher than the consensus expectation for a hike to 20 percent."

"It's definitely a positive surprise and not what the market was expecting. The finance minister and central bank (governor) are doing the job the market was hoping for when they were first elected," said Himanshu Porwali, EM credit analyst at Seaport Global, London.

"The lira is up, bonds are reacting positively and that is reflecting the market sentiment."

The move sparked a rally in the country's financial markets with banking sector stocks soaring nearly 10 percent, the lira rising and its dollar-denominated government bonds also making solid gains.

"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," according to the central bank.