ISTANBUL: Turkey’s central bank unexpectedly hiked interest rates by 500 basis points to 50% on Thursday, citing a deteriorating inflation outlook and pledging to tighten even further if it expects the price situation to worsen significantly.

The hawkish surprise came 10 days before nationwide local elections and was seen by analysts as a signal that the central bank was independent from any political constraints, and determined to tackle inflation that is soaring toward 70%.

In response the lira currency rallied as much as 2% and settled around 31.9 against the dollar, reversing weeks of steady declines, and Turkey’s dollar bonds extended a rally.

The rate hike - which outstripped virtually all forecasts - “stunned the market,” said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.

“Today’s decision is a very strong signal that Governor (Fatih) Karahan, who took over from (Hafize Gaye) Erkan when she unexpectedly resigned, is determined to bring staggeringly high inflation under control,” he said.

The bank has now raised its key one-week repo rate by 4,150 basis points from 8.5% since last June, following President Tayyip Erdogan’s victory in May elections and U-turn towards greater orthodoxy in economic policy.

The “tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range,” it said.

Policy “will be tightened in case a significant and persistent deterioration in inflation is foreseen,” it added after the monthly meeting of its monetary policy committee.

To reinforce the tightening move, the central bank also adjusted its policy operational framework, setting the overnight borrowing and lending rates 300 basis points below and above the repo rate.

PRE-ELECTION RATE HIKE Inflation rose to a higher than expected 67% last month, when the central bank had held rates steady after a sustained string of hikes since June.

While inflation is expected to dip around mid-year, expectations remain stubbornly high. The recent lira slide coupled with declining foreign reserves had raised some expectations of more rate hikes ahead - though not until after the March 31 municipal vote for which Erdogan’s AK Party is trying to win back key cities like Istanbul.