Shock increase outstrips almost all forecasts
First lira rally in weeks; bonds also rally
Policy rate raised by 4,150 basis points since last June
Bank says will tighten further if inflation deteriorates

ISTANBUL, March 21 Reuters Turkey39;s central bank unexpectedly hiked interest rates by 500 basis points to 50 on Thursday, citing a deteriorating inflation outlook and pledging to tighten even further if it expects the price situation to worsen significantly.

The hawkish surprise came 10 days before nationwide local elections and was seen by analysts as a signal that the central bank was independent from any political constraints, and determined to tackle inflation that is soaring toward 70.

In response the lira currency rallied as much as 2 and settled around 31.9 against the dollar, reversing weeks of steady declines, and Turkey39;s dollar bonds extended a rally.

The rate hike which outstripped virtually all forecasts stunned the market, said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.

Today39;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.

The bank has now raised its key oneweek repo rate by 4,150 basis points from 8.5 since last June, following President Tayyip Erdogan39;s victory in May elections and Uturn towards greater orthodoxy in economic policy.

The tight…