With the stakes so high, market watchers expect rate hikes and an end to credit-driven growth of the country that has prevailed for the last three years.
The lira regained its losses when the president who investors say plays a big role in monetary policy decisions said in the same speech that Turkey's main priority is the fight against inflation, which has been stuck near 12% all year.
Turkey's central bank last changed its policy rate in September when it increased it to 10.25% from 8.25% due to higher than expected inflation rate. However, the rupture had emerged after Turkish President Recep Tayyip Erdogan, who had previously always insisted on low interest rates, surprisingly dismissed the previous central bank governor, who he appointed in mid-2019, two weeks ago and also appointed a new treasury minister after the resignation of his finance minister. Turkey's currency is still down 22 per cent since the end of past year.
The markets reacted favourably to the new appointments and promises of reform and the lira has been firming against the dollar.
The ongoing currency collapse had heightened concerns about a payment crisis in the country because Turkish companies and the state are heavily indebted in foreign currencies. According to the judgment of economists, this contributed to the fact that the current account was in deficit even before the outbreak of the corona pandemic. "However, investors were increasingly focused on whether the decision would mean a shift towards orthodox policymaking - that is, a transparent monetary policy framework based on a key rate".
The central bank's monetary policy committee chose to implement strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process, the central bank said in a statement.
Amid the prospect of early elections and political shakeouts, the economic turmoil is worsening with the currency sinking to record lows as the central bank, under political pressure for not raising rates, held key interest rates steady at around 10.25 percent.
The Turkish Lira gained ground against the USA dollar in the European session on Thursday, after Turkey's central bank raised interest rate by 475 basis points, saying that the depreciation of the Turkish lira, increasing global food prices and deterioration in inflation expectations pose risks to the inflation outlook.
Yet economists noted that the central bank's past complex system of lending had managed to push the real cost of borrowing to 14.8 percent.
However, these were not enough to contain the inflation rate, which at an annual rate of 11.89 percent in October is well above the actual target of five percent, or to reassure global investors.
It remains to be seen whether Erdogan, who sees high interest rates as an obstacle to economic growth, will accept an increase or if he will proceed to fire Agbal, risking further destabilisation in the lira's value.
Albayrak has been replaced by Lutfi Elvan, former deputy prime minister of Turkey. He also wants to focus on growth, exports and employment.
"We should not let our investors be oppressed by high interest rates", he said on Wednesday.