The Turkish central bank raised Thursday its key policy rate, the one-week repo auction rate, by 500 basis points, from 45% to 50%, surprising markets with a hefty hike in a highly anticipated decision ahead of local ballots later this month.

"The Monetary Policy Committee (MPC) has decided to raise the policy rate (the one-week repo auction rate) from 45% to 50%," the Central Bank of the Republic of Türkiye (CBRT) said in a statement.

"The Committee has also decided to adjust the monetary policy operational framework by setting the central bank overnight borrowing and lending rates 300 basis points below and above the one-week repo auction rate, respectively," it added.

The bank stated that "the underlying trend of monthly inflation was higher than expected" in February and pledged to maintain a tight stance until the trend significantly and sustainably drops.

It noted that imports of consumption goods and gold slowed, improving the current account balance, but other indicators implied domestic demand remained "resilient."

"Stickiness in services inflation, inflation expectations, geopolitical risks and food prices keep inflation pressures alive," the statement said.

The central bank was envisaged to keep the interest rates unchanged according to a recent Reuters poll in which 20 of 22 respondents expected the bank to keep the rate steady in March, while the other two forecasted a 250 basis-point hike.

Similarly, in an assessment of the Anadolu Agency (AA), the analysts expected the country's monetary authority to keep the rate constant at 45%.

Societe Generale Central and Eastern Europe, Middle East and Africa strategist Marek Drimal predicted that the CBRT would keep the policy rate constant at 45% at the MPC meeting, despite the recent upward surprise in inflation.

In Touch Capital Markets senior FX Analyst Piotr Matys also told AA that the CBRT is expected to keep the policy rate unchanged at 45%.

All economists participating in an AA survey last week said they expected the bank to leave the policy rate unchanged.

Inflation has risen to 67.07% and is expected to peak by midyear before entering what officials call a downtrend from the second half of the year.

With the latest hike on Thursday, the bank has now raised its one-week repo rate by 4,150 basis points from 8.5% since last June, following President Recep Tayyip Erdoğan's victory in the May elections and a U-turn in economic policy.

The central bank has recently taken other steps to tighten credit, including action on reserve requirements. Last Saturday, it also raised the maximum interest rate on credit card cash withdrawals.

"In response to the deterioration in the inflation outlook, the Committee decided to raise the policy rate. A 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 central bank said.

"Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen."

The rate hike "stunned the market," Matys said.

"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.

In its statement, the bank also reiterated its expectation that "disinflation will be established in the second half of 2024."

"The Committee continues to implement macroprudential policies to preserve the functionality of the market mechanism and macro-financial stability. In this context, financial conditions were tightened and monetary policy transmission was reinforced with the measures taken in March," it was noted.

Furthermore, it said the monetary transmission mechanism would continue "to be supported in case of unanticipated developments in credit growth and deposit rates."

The central bank also said that considering the lagged effects of monetary tightening, the Committee would make its policy decisions in a way that will create monetary and financial conditions necessary to ensure a decline in the underlying inflation trend.

In response to the decision Turkish lira rallied as much as 1.5% to 31.91 against the dollar, reversing recent declines, and Türkiye's dollar bonds extended a rally.