The Lira rose after the decision and was trading around 5% higher at 7.1 per Euro. It has lost around 40 percent of its value this year.
The bank’s decision was announced hours after Erdogan triggered uproar by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions. The independence of monetary policy has been in doubt since Erdogan pledged in his election campaign this year to take on a greater role to bring interest rates lower.
A rate hike is an important step to restore market confidence in the lira. This is critical in order to reduce the risk of a full-scale financial crisis that could be followed by a prolonged recession.
The Turkish Central Bank announced that recent developments regarding the inflation outlook point to significant risks to price stability. In a press statement issued today it states that ‘’Deterioration in the pricing behavior continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions. Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability’’.
''The Central Bank will continue to use all available instruments in pursuit of the price stability objective,'' the announcement said.