By Ali Kucukgocmen and Can Sezer
ISTANBUL (Reuters) -Turkey's central bank hiked its key rate by 650 basis points to 15% on Thursday and said it would go further in a reversal of President Tayyip Erdogan's policy, although the post-election tightening missed expectations and the lira fell sharply.
In its first meeting under new Governor Hafize Gaye Erkan, the bank changed course after years of monetary easing in which the one-week repo rate had dropped to 8.5% from 19% in 2021 despite soaring inflation.
Analysts said the move suggested Erkan might have limited room to aggressively tackle inflation under Erdogan's watch. The median estimate in a Reuters poll was for rates to rise to 21%.
Thirty minutes after the hike - Turkey's first since early 2021 - the lira suddenly began to tumble and later touched an all-time low of 24.80 versus the dollar, some 5% weaker than Wednesday's closing level.
The central bank's policy committee said the 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".
Striking a more hawkish tone than a month earlier, it said it raised rates "in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour".
Annual inflation was just below 40% in May after touching a 24-year high above 85% in October last year. The central bank said inflation will come under further pressure.
It added it will gradually "simplify and improve the existing micro- and macroprudential framework" to improve market mechanisms and stability - suggesting some of the dozens of regulations adopted since late 2021 could be rolled back, freeing up credit, forex and debt markets.
Erkan will meet with a group of bank executives on Friday, a banking source told Reuters on Thursday, after new Finance Minister Mehmet Simsek met with them last week and discussed the problems in the sector.
LIMITED ROOM FOR MANOEUVRE
A senior Turkish official said the rate hike was designed in part to avoid excessive market volatility and shows a determination to tighten policy, adding that such strong steps will continue in the future.
Erdogan had urged rate cuts over the last two years which sparked a late-2021 currency crisis and stoked prices. The lira lost 44% in 2021 and 30% last year, despite the central bank's efforts to counter forex demand by using its forex reserves.
After his election victory last month, Erdogan signalled he was ready to backtrack on economic policy in appointing Simsek, who is highly regarded by markets, as finance minister and Erkan, a former Wall Street banker, as central bank chief.
Erdogan said last week he approved the steps Simsek would take, suggesting he had given the green light to rate hikes.
The policy decision could indicate that "Erkan has limited room for manoeuvre in restoring orthodoxy in monetary policy," said Piotr Matys, senior FX analyst at InTouch Capital Markets.
"One could argue that it will take time to restore shattered confidence, but it would be more efficient to exceed expectations if Governor Erkan wants to convince investors that she is in charge of monetary policy and not President Erdogan," he added.
Most economists in the Reuters poll expected further rate hikes this year, with the year-end forecast median at 30%. The central bank's key rate remains below deposit rates that reach up to 40% and real rates are still deeply negative.
The bank's net reserves fell to a record low of negative $5.7 billion last month before rebounding as Ankara loosened its grip on the forex market this month. The lira has shed 23% so far this year.
Turkey's credit default swaps (CDS), the cost of insuring exposure to its debt, rose 21 basis points to 518 basis points after the smaller-than-expected rate hike.
Some analysts expressed doubt about Erdogan's commitment to abandoning his unorthodoxy, citing examples of his previous shifts to orthodox policy only to quickly change his mind.
Authorities hope foreign investors and hard currency will return after a years-long exodus, potentially reducing the central bank's need to intervene to keep the lira stable.