ISTANBUL, July 20 Reuters Turkey39;s central bank hiked its policy rate by 250 basis points to 17.5 on Thursday, continuing to reverse President Tayyip Erdogan39;s lowrates policy, but the tightening fell short of expectations with inflation expected to rise sharply.

It was the second meeting under new Governor Hafize Gaye Erkan, who is leading a change of course after the oneweek repo rate was cut to 8.5 from 19 since 2021 despite soaring inflation.

The bank said after its monetary policy committee meeting that it will continue to tighten monetary policy and expected further upwards pressure on inflation due to recent tax hikes.

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, it said.

The lessthanexpected tightening comes despite expectations that inflation, which fell to 38.21 in June, will rise in the rest of the year. Economists are revising their yearend forecasts to as high as 60 due to the lira39;s continued decline and various tax hikes in July.

The bank had raised its key rate by 650 basis points to 15 in June and had been expected to hike to 20 this time, according to the median estimate in a Reuters poll.

Economists expect the policy rate to rise further to 25 by yearend, still leaving real rates negative. They warn that Erdogan39;s influence over the central bank limits how far it can go in tightening policy.

The lira traded at…