This unexpected move reflects a newfound determination by Turkey’s central bank to tackle surging inflation, as part of a broader shift in policy direction.

This adjustment brings the interest rate to its highest level since 2019 and propels the Turkish currency to its strongest position against the US dollar since mid-July.

The bank’s policy committee reiterates its commitment to implementing necessary tightening measures in a gradual and timely manner to combat the soaring inflation, which reached nearly 48% the previous month.

Analysts interpret this action as a decisive stride toward adopting more conventional economic strategies, marking a departure from the unconventional approaches observed during President Tayyip Erdogan’s tenure. This move is expected to aid in curbing inflationary expectations.

In the lead-up to the policy announcement, the Turkish lira had been consistently hitting record lows, but in response to the interest rate hike news, it experienced a notable surge of over 3% against the US dollar, trading at 26.41 at 08.05 a.m. ET.

Economists had originally projected a rate increase to 20%, as indicated by a Reuters poll. Some had even anticipated a more accommodative approach, considering the central bank’s failure to meet expectations in the preceding two months.

The poll, conducted in the previous week, indicated that the interest rate would likely reach 25% only by year-end.

Piotr Matys, senior FX analyst at In Touch Capital Markets, remarked that this rate hike sends a robust signal of the central bank’s commitment to curbing inflation, resulting in a positive initial market response. Nonetheless, there are concerns about whether President Erdogan endorsed this rate hike.

After his re-election in May, Erdogan appointed former Wall Street banker Hafize Gaye Erkan to lead the central bank, amidst economic challenges stemming from dwindling foreign currency reserves and escalating inflation expectations.

In July, he introduced three new policymakers—Osman Cevdet Akcay, Fatih Karahan, and Hatice Karahan—to the central bank. This move was interpreted as a sign that independent economists might adopt a more resolute stance against the persistent inflation, which has remained well above the official 5% target for an extended period.

Erdogan’s previous push to lower interest rates triggered a currency crisis in late 2021, resulting in inflation surpassing 85% last year.

Over the course of two years, the currency has experienced a significant decline of approximately 68%, largely attributed to Erdogan’s previous vocal opposition to high interest rates and his influence over the central bank.