The Central Bank of the Republic of Türkiye (CBRT) on Thursday hiked its key policy rate or one-week repo rate by 650 basis points to 15%, its first such rise in 27 months, as it turns to more conventional economic policies to counter sky-high inflation.

The bank hiked its key rate from 8.5% in the closely watched first interest rate-setting meeting since President Recep Tayyip Erdoğan filled his government with investor-backed faces after winning tight May polls.

"Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved," the central bank said.

The bank's policy-setting committee "will continue to take its decisions in a predictable, data-driven and transparent framework," it said in a statement.

"In addition, in order to be able to sustain price stability in the long term, the Central Bank of the Republic of Türkiye will continue to support strategic investments that will improve the current account balance," it added.

Türkiye's current account balance posted a deficit of $5.4 billion in April, up from $4.9 billion in March.

The meeting is the sixth Monetary Policy Committee (MPC) meeting this year and the first under the helm of Hafize Gaye Erkan, the bank's new governor.

Ahead of today's announcement, economists' expectations for the rate hike ranged widely, from 14 to as high as 40 percentage points.

Erdoğan revamped his financial team following his May election victory, bringing in prominent figures such as Mehmet Şimşek, the new finance minister, and Erkan, the first woman to lead the country's central bank.

The appointments were seen as a sign that Türkiye would change course and abandon the unorthodox belief that lowering interest rates fights inflation.

The central bank cut its key interest rate from around 19% in 2021 to 8.5% earlier this year, despite soaring inflation.

The annual inflation rate reached 85% late last year and the central bank burned through most of its reserves trying to prop up the lira – down 90% against the dollar over 10 years – from even bigger falls.

Inflation has eased to 39.5% last month, according to official figures.

Turkish media previously said the new finance minister agreed to join the government only after winning assurances that he would be free to steady the ship as he saw fit.

Erdoğan said last week that he "accepted" that his new team would pursue policies that contradicted his own firmly held beliefs.

Erdoğan still defends that high interest rates contribute to – rather than cure – rising consumer prices that have been Türkiye's bane for the past five years.

On Tuesday, the government increased the minimum wage by 34% – a move that critics say is designed to ease the impact of inflation on households in the run-up to next year’s municipal elections.

Borrowed time

The lira has lost an additional 15% against the dollar since the May 28 election runoff – a sign that the central bank is slowly unwinding its costly currency defense.

Şimsek and newly appointed Vice President Cevdet Yılmaz – a technocrat also admired by investors – jetted to petrodollar-rich Abu Dhabi on Thursday to drum up new investments and loans.

Some analysts encourage the new team to act quickly while others suggest that Türkiye's economic problems are too complex to address at the same time.

One of Türkiye's most costly programs involves a bank deposit protection scheme that the government rolled out in late 2021.

It commits the government to cover any losses lira deposits incur from the currency's depreciation against the dollar.

That means that a quick return to a free-floating exchange rate could put an even bigger burden on the strained budget.

Many expect Şimsek to gradually phase out the scheme.

Erdoğan said Wednesday that he was putting his trust in his new appointments.

"We have placed very heavy responsibilities on our economic management. We have established a strong, harmonious and competent team," he said.

Şimşek on Thursday, commented on the central bank's decision.

He said the "Century of Türkiye" philosophy centers around stability, trust and sustainability.

The economic policy, he said, will also prioritize these concepts to improve the lives of citizens and future generations. Sustainable growth depends on investments, employment and productivity, with predictability being crucial, şimşek said, noting that trust can be achieved through rule-based policies and implementation.

This includes a rule-based monetary policy for price and financial stability, predictable fiscal policy for a stable public sector, and a policy framework based on market economy principles, he said, adding that these measures will attract capital flow, facilitate financing, stabilize the Turkish lira and prevent dollarization.