Turkey’s central bank raised its key interest rate more than expected to 25% on Thursday, signaling that it is ready to meet its new pledge to reduce inflation through monetary policy, CNBC reported.

Previously, the monetary policy rate was 17.5%.

Economists polled by Reuters had expected an interest rate hike of up to 20%.

The Turkish lira rose against the US dollar and the euro in choppy trading following the announcement of a new key interest rate.

As of 15:40 London time, the dollar was down about 5.3% against the pound, while the euro was down 5.9% against the pound.

In a statement on Thursday, Turkey’s central bank board said it had “decided to continue the process of tightening monetary policy in order to set a course for lower inflation as soon as possible, anchor inflation expectations and control worsening price behavior.”

The continued steady pace of inflation prompted the central bank to recently revise its year-end inflation forecast from 22.3% to 58%.

On Thursday, the bank said it expected year-end inflation to be “at the upper end of the forecast range.”

Inflation has slowed since a peak of 85% in October 2022, but accelerated from 38% in June this year to nearly 48% in July.

The central bank on Thursday attributed continued volatility in domestic inflation to strong domestic demand, wage pressures, exchange rates, persistent inflation in the services sector and tax legislation.

A new direction

Turkish President Recep Tayyip Erdogan appointed former Wall Street banker Hafiz Gaye Erkan to head the central bank in June, signaling a departure from a controversial policy of cutting interest rates as inflation rises.

Since then, the central bank has announced interest rate hikes in June and July, although the July move was lower than market expectations.

Liam Peach, senior emerging markets economist at Capital Economics, said on Thursday that the latest rate hike “will go a long way in reassuring investors that a return to policy orthodoxy is on the way.”

Peech said uncertainty about the outlook for the key interest rate had increased, and it was now likely to rise above 30% in the coming months.

“From Turkey’s macroeconomic perspective, a rate hike could make a big difference, paving the way for the central bank to raise interest rates significantly and address Turkey’s macroeconomic imbalances,” he said.

“If President Erdoğan agreed with this decision, that is another matter, and we simply cannot rule out the dismissal of Governor Erkan as a result of this move,” he added.