The Turkish lira surged against the U.S. dollar to a level not seen since June on Thursday, after the Central Bank of Turkey increased its interest rates to 25% from 17.5%.
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“The Committee decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior,” the central bank said. In July, inflation in Turkey was 47.8%.
It’s the second interest rate increase from the central bank since the country’s first female central bank head, and former Goldman Sachs executive Hafize Gaye Erkan, took charge in early June.
Investors have been waiting to see how much control Erkan will have as President Recep Tayyip Erdogan had previously pressured the central bank to cut interest rates based on his unorthodox view that lower rates would reduce costs for businesses and help ease inflation, but those rate cuts sent the lira spiraling lower.
The surprise interest rate hike drew some positive response from experts. “All is not lost on Turkey. Kudos to the central bank for hiking today much more than expected. More steps like this and Lira can go well below our $/TRY 21.00 fair value,” said Robin Brooks, chief economist at the Institute of International Finance on Twitter.
He added that the rise in rates will help attract capital inflows and increase the country’s economic growth.
“A pleasantly positive surprise and this is the job of the central bank – to get ahead of the curve and LEAD expectations!!!!” said Mohamed El-Erian, chief economic adviser at Allianz, on Twitter.
