ISTANBUL, Sept. 24 (Xinhua) -- The Turkish Central Bank (CBRT) hiked its main policy rate by 200 basis points in a highly anticipated meeting on Thursday to defend the embattled national currency which hit new record lows this week.
The Monetary Policy Committee of the CBRT raised the policy rate from 8.25 percent to 10.25 percent in an unexpected move as analysts were expecting that the bank would maintain its rates steady and not reverse an easing cycle that kept borrowing costs below inflation.
"The committee considers that the continuity of the disinflation process is of great importance for the decline in the country's risk premium, the fall in long-term interest rates, and the strengthening of the recovery in the economy," the CBRT said in a statement.
Immediately after this decision, the Turkish lira firmed by 1.1 percent to 7.62 against the U.S. dollar. The Turkish currency hit a new all-time low on Wednesday evening to 7.71 for a dollar.
"The CBRT does the right thing and hikes its main policy rate. I don't think many people expected that. They now have a chance of defending the Turkish lira ... It is a big turning point," Timothy Ash, a London-based economist covering emerging markets, said on his Twitter account.
Last month, the CBRT held its policy rate steady, after having recently taken backdoor steps to raise the cost of funding to support the lira.
The bank held its rate steady at the previous two meetings, following a nearly yearlong easing cycle that saw the policy rate cut aggressively from 24 percent.
The Turkish national currency, losing over 20 percent of its value against the dollar this year as the COVID-19 pandemic has deepened Turkey's already existing vulnerabilities.
The weaker lira comes after the CBRT and state banks spent billions in foreign exchange reserves to support the lira earlier this year.
But there is also an upside of a weaker lira. Turkish Treasury and Finance Minister Berat Albayrak said a weaker lira could help make Turkish exports more competitive and boost tourism revenue which is vital for the economy.
As in many other countries hit by the coronavirus pandemic, businesses in Turkey have suffered from lockdowns. As a result of coronavirus restrictions, the emerging nation's economy shrank nearly 10 percent in the second quarter of this year.
While the Turkish government is expecting a very modest positive growth this year, international monetary organizations predict a narrowing between three and five percent of the GDP.
Turkey was recovering from a 2018 currency meltdown when the COVID-19 outbreak hit in mid-March, increasing the country's burdens of high foreign-denominated public and corporate debt and widening current account deficit.