Türkiye's central bank on Thursday surprised the market with a larger-than-expected interest hike as it lifted its benchmark one-week repo rate by another 500 basis points to 40% in the sixth straight rise under a new governor and the shift in policymaking.

The bank, however, signaled that the pace of monetary tightening will slow down with the tightening cycle to be completed in a short period.

"The current level of monetary tightness is significantly close to the level required to establish the disinflation course," the Central Bank of the Republic of Türkiye (CBRT) said in a statement.

"Accordingly, the pace of monetary tightening will slow down and the tightening cycle will be completed in a short period."

Economists polled by an Anadolu Agency (AA) survey last week expected the bank would deliver a 250 basis points rate hike.

A Reuters poll similarly on Monday showed that the bank is expected to raise its policy rate by 250 basis points to 37.5% this week – according to 21 institutions in the poll. One predicted 300 basis points and another predicted 350.

According to the latest data from the Turkish Statistical Institute (TurkStat), Türkiye's annual inflation eased to 61.36% in October from a nine-month high of 61.53% in September.

"Headline inflation edged down in October and remains in line with the outlook presented in the most recent Inflation Report. The existing level of domestic demand, the stickiness in services inflation and geopolitical risks keep inflation pressures alive. On the other hand, recent indicators suggest that domestic demand has started to moderate as the monetary tightening is reflected in financial conditions," the central bank further said.

The bank, in its last quarterly inflation report of the year earlier this month, revised its year-end inflation forecasts upward for this year and the next.

It expects inflation to rise from around 61.4% last month to peak at 70%-75% in May before dipping to about 36% by the end of next year.

"Getting high and volatile inflation under control will be a long and difficult process. We will continue to use all tools available in a determined way to ensure disinflation," CBRT Governor Hafize Gaye Erkan said at the time.

"Really impressive move by the (central bank) ... getting well ahead of expectations," emerging markets economist Timothy Ash remarked in an emailed note.

The bank's previous policy of cutting interest rates amid high inflation was accompanied by a steep decline in lira in 2021, after which the government introduced a scheme that protects lira deposits from foreign exchange depreciation. The central bank meanwhile initiated a gradual exit from the scheme, also known as KKM, while the shares of Turkish lira deposits began to rise.

Excluding the KKM scheme, the share of lira deposits in the banking system has risen 7 percentage points in the last three months to above 38% amid government efforts to reduce dollarization.

President Recep Tayyip Erdoğan chose former Wall Street banker Erkan as central bank chief after his May reelection.

"To increase the functionality of market mechanisms and strengthen macro-financial stability, the committee continues to simplify and improve the existing micro- and macroprudential framework," the bank said.

"While lending rates are assessed to be in line with the targeted level of financial tightness, the committee evaluates that the regulations to increase the share of Turkish lira deposits and monetary tightening will continue to strengthen the transmission mechanism and to improve the funding composition of the banking system."

The bank has raised its one-week repo rate by 3,150 basis points since June, with 500-point hikes in the previous two months.