In an unexpected move, the Turkish central bank on Thursday raised its key interest rate to 46% from 42.5%, in an attempt to reassure investors after domestic unrest and escalating trade tensions with the United States drove the Turkish lira to a sharp decline.
The Monetary Policy Committee, led by Governor Fatih Karahan, decided to raise the one-week repo rate by 350 basis points, while the overnight lending rate was raised to 49% from 46%, according to a statement from the central bank.
This monetary move follows an emergency meeting held by the bank last month after the Turkish lira collapsed following the imprisonment of Istanbul Mayor Ekrem İmamoğlu, a prominent opponent of Turkish President Recep Tayyip Erdoğan, which led to a sharp sell-off in the markets.
Economists estimate that the bank spent about $50 billion of its reserves to support the lira and prevent it from sliding, amid escalating domestic political tensions and growing external concerns about the repercussions of US tariffs on Turkey and other countries.
Despite the pressure, the Central Bank's interventions have succeeded in stabilizing the lira's exchange rate at around 38 liras to the dollar since the initial decline. However, this stability came at the cost of a significant depletion of foreign reserves, according to an analysis by Bloomberg Economics.
Turkey's annual inflation rate slowed more than expected in March, although the data did not include the effects of the recent political and economic turmoil resulting from Davutoğlu's detention.
In its statement, the Central Bank of Turkey affirmed its commitment to a tight monetary policy stance, stressing that interest rates will be adjusted cautiously over the coming period based on Turkish inflation data and market developments, with the goal of achieving lasting price stability.
Annual price growth in March reached 38.1%, compared to 39.1% in February, according to the Central Bank.
(1 United States Dollar equals 38.02 Turkish lira)
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