Turkey stuns market with 500-point rate hike to 50%

Turkey's central bank unexpectedly raised interest rates by 500 basis points to 50% today, citing a deteriorating inflation outlook and pledged to tighten further if significant and persistent deterioration in inflation is foreseen.

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," the bank said. The rate hike"stunned the market," said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.

Though inflation is expected to dip around mid-year, 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. Tighter fiscal policy is expected after the coming elections, adding to the rising credit costs and compounding economic pain for Turks after a years-long cost-of-living crisis.

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