Turkey's central bank surprised markets on Thursday with a bigger than expected rate hike to battle soaring inflation and boost the lira, prompting the embattled currency to surge in value.
Turkey has in recent weeks been battling through one of the most troubled periods for its economy under the rule of president Recep Tayyip Erdogan, with the lira battered on currency markets in August.
The central bank hiked the one week repo auction rate 625 basis points from 17.75 percent to 24 percent, significantly higher than the Bloomberg consensus of an increase to 21 percent.
The lira reacted strongly to the decision, rising by five percent in value to 6.0 lira to the US dollar. It later shed some of those gains but was still up nearly three percent in value at 6.16 to the dollar after 1330 GMT.
The magnitude of the hike was all the more surprising given that just before the decision Erdogan had slammed interest rates as a "tool of exploitation".
"It was a big surprise to us, but probably to every Turkey-watcher," said Nora Neuteboom, an economist at ABN Amro, saying the move was a "positive signal" with the bank wanting to show its independence and commitment to fight inflation.
"However, one swallow doesn't make a summer," she warned.
In another bid to prop up the lira, Erdogan earlier on Thursday ordered by decree that property agreements in foreign currencies would not be allowed.
- 'Strong monetary tightening' -
The bank had not touched interest rates since early June with markets becoming increasingly concerned that the policy of the nominally independent bank is being dictated by Erdogan.
There had been indications from the bank that it would raise rates after inflation came in at nearly 18 percent in August.
The bank described the hike as a "strong monetary tightening to support price stability".
It vowed the tight stance in monetary policy would be "maintained decisively until inflation outlook displays a significant improvement".
The bank must balance concerns over slipping growth, which, although a robust 5.2 percent in the second quarter on an annual comparison, showed signs of weakness with some analysts predicting Turkey is heading for recession.
The bank's intervention was the latest aggressive rate hike to calm economic turbulence in an emerging market after the Argentinian central bank's recent hike from 45 to 60 percent on August 30.
But Neuteboom of ABN Amro said much more was needed for Turkey to turn around "the negative spiral" the economy is in.
"Turkey needs structural reforms to increase productivity, to decrease its dependence on short-term portfolio flows and to decrease the rigidness in the labour market."
- 'Tool of exploitation' -
Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and interest rates.
He earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.
"Interest rates are the cause, inflation is the result. If you say 'inflation is the cause, the rate is the result', you do not know this business, friend," he added.
Anthony Skinner, director of Middle East and North Africa at Verisk Maplecroft, told AFP he believed the hike had already been agreed. "Erdogan's speech... was intended to put distance between himself and the (bank's) decision."
The bank implemented what economists described as a hidden interest rate hike in mid-August, forcing banks to borrow at the higher 19.25 percent through the overnight lending facility.
The bank later said funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.
Analysts say the lira's plunge last month had been sparked by a combination of concerns over domestic policymaking and a crisis in relations with the United States.
As well as being seen to undermine the independence of the central bank, Erdogan in July stunned markets by appointing his son-in-law Berat Albayrak as finance minister.
Relations with the US deteriorated last month after Washington imposed sanctions on two Turkish ministers over the detention of an American pastor and president Donald Trump doubled steel and aluminium tariffs on Turkey.