Turkey’s central bank on Thursday left its benchmark interest rate unchanged as expected and promised to tighten policy more if needed to battle inflation even after sharp hikes in recent months.

The Central Bank of the Republic of Turkey (CBRT) kept the policy rate – the one-week repo rate – at 17% at the first Monetary Policy Committee (MPC) meeting of the year, after two consecutive rate hikes since November.

The Turkish lira rallied nearly 1% in response as analysts pointed to hawkish forward guidance that kept the door open to more interest rate hikes.

The central bank said it would "maintain decisively the tight monetary policy stance for an extended period until strong indicators point to a permanent fall in inflation."

"Additional monetary tightening will be delivered if needed," it said in a statement, adding it would take a bit more time for recent rate hikes to influence credit and domestic demand.

The country’s consumer prices edged higher than expected in December as food costs jumped, keeping the pressure on the central bank to maintain a tight monetary policy.

The annual inflation increased to 14.6% from 14% in November, according to the official data. Month-on-month, consumer prices rose 1.25% in the month.

QNB Finansbank Chief Economist Erkin Işık said any return by the central bank to an easing cycle would be later than previously expected, given the bank’s vow to keep policy tight for an extended period.

"By not hiking rates, I understand the central bank does not expect a further rise in inflation in the short term," he told Reuters.

Under the newly appointed Gov. Naci Ağbal, the bank has hiked its one-week repo rate by 675 basis points from 10.25% since November, in an effort to support the lira and bring down inflation that surged in the last two months of the year.

"The decelerating impact of the strong monetary tightening implemented in November and December MPC meetings on credit and domestic demand is expected to become more significant," the bank said.

Therefore, it added, the effects of demand and cost factors on inflation are projected to diminish gradually.

Ağbal last month said the policy will remain tight in 2021 to finally lower inflation in a lasting way and hit a target of 5% by 2023. He stressed that the bank was determined to meet its inflation forecast of 9.4% for the end of 2021.

In a Reuters poll, the median estimate of 20 economists was for no change to the 17% policy rate. Three of those expected a hike to 17.50%, while two others forecast 18%.

The decision was also in line with the forecasts of most analysts in a Bloomberg survey. The dissenters, including economists at Morgan Stanley and Societe Generale SA, had predicted an increase of 50 to 100 basis points.

A total of 34 economists surveyed by Anadolu Agency (AA) on Monday also forecast no change in interest rates except for six economists expecting a rise of 50 to 100 basis points.

Ağbal was appointed in November by President Recep Tayyip Erdoğan, who pledged a new market-friendly economic era including tough decisions to lower price rises.

The lira has since rallied from record lows on new foreign inflows and Ağbal’s pledge to keep policy tight.

Turkey’s dollar-denominated sovereign bonds gained after the bank decision, with issues maturing in 2030 or beyond adding at least 0.6 cents to trade at their highest in almost a week, according to Tradeweb data.