Turkeys central bank has lifted its benchmark interest rate by 2 percentage points in an unexpected move that reversed president recep tayyip erdogans push for lower rates and boosted the lira.

The bank announced on thursday that it would raise its one-week repo rate from 8.25 per cent to 10.25 per cent. the lira rose more than 1 per cent against the us dollar to tl7.6020, though it later reversed some of those gains.

President erdogan, who has de facto control over the central bank, is a longstanding and vocal opponent of high interest rates.

The turkish president sacked the banks previous governor in july last year, complaining that he wouldn't follow instructions on interest rates. the bank launched a series of rate cuts after a new governor was appointed. mr erdogan said he wanted to reach single-digit rates in an attempt to revive the countrys previous fast-paced, credit-fuelled growth.

While cheap credit has helped to cushion the impact of the coronavirus crisis on the turkish economy, it has also piled pressure on the lira.

Economists and investors have for months urged the bank to lift rates to slow the pace of credit growth and stave off a repeat of the currency crisis that the country experienced two years ago. the lira has fallen by more than 20 per cent against the dollar since the start of the year, while inflation stood at 11.7 per cent last month.

Even a dependent central bank can make the right decision from time to time, said erik meyersson, a senior economist at the swedish bank handelsbanken. the lira was moving quite fast in the past week. i think thats what may have given [the central bank] the political room [to raise rates].

As well as raising the headline rate of interest, the central bank also increased the rate of interest on its late liquidity window, an additional source of funding for banks, to 13.25 per cent.

The central bank has recently been using the late liquidity window as a way of increasing banks borrowing costs through the back door, pushing the average cost of funding for turkish banks up to 10.6 per centhigher than the new official policy rate.

Most analysts had forecast the bank would either take no action or raise rates by stealth by continuing its unorthodox use of these other facilities to increase the cost of borrowing.

It was definitely a surprise, said per hammarlund, chief emerging markets strategist at the nordic bank seb, who said the central bank took the bull by the horns and took a step in the right direction.

The move sends a signal to the market that they are concerned about the weakness of the lira and they realise that they need to contain inflation, mr hammarlund said. however, he added: its simply a reaction to the inevitable.

While thursdays decision gave some respite to the lira, analysts said the central bank would need to go further to support the currency and rebuild its credibility.

Even after the rate increase, real interest rates remain negative once inflation is taken into account.

Much more needs to be done to adopt a constructive view on the lira, said piotr matys, an emerging market currency strategist at rabobank. he pointed to turkeys consistent overshooting of its 5 per cent inflation target and low central bank credibility as reasons why sentiment among foreign investors remained cautious.

Because it has low credibility, it cannot afford to have negative real interest rates, he added.

Turkeys large current account deficit, an exodus of foreign capital and mistrust of the lira among turkish savers have combined to put heavy pressure on the currency in recent months. a multibillion dollar currency intervention by turkish authorities, which goldman sachs estimates has cost $78bn this year, failed to prevent the lira from hitting a series of record lows against the us dollar.

Rating agency moodys recently warned that the risk of a full-blown crisis in turkey was growing as it cut the countrys debt rating deeper into junk territory and said its institutions appeared either unwilling or unable to effectively address these challenges.

There was no immediate reaction from either mr erdogan or his son-in-law, finance minister berat albayrak, to the central banks latest move, and it was not clear whether the decision was made with the presidents blessing.