Turkey hikes key rate 500 points to 50% in surprise move

ISTANBUL, March 21 (Reuters) - Turkey's central bank unexpectedly raised its key interest rate by 500 basis points to 50% on Thursday, citing a deteriorating inflation outlook and pledging to keep a tight stance until there is a significant and sustained drop in the trend.

The bank has now raised its one-week repo rate by 4,150 basis points from 8.5% since last June, following President Tayyip Erdogan's victory in May elections and U-turn towards greater orthodoxy in economic policy.

Inflation has risen to 67% and is expected to dip around mid-year, though a sliding lira currency and declining foreign reserves had raised some expectations of more rate hikes ahead.

In a Reuters poll, 20 of 22 respondents expected the bank to keep the rate steady in March, while the other two forecasted a 250 basis-point hike. The poll showed however that a strong majority expected it to hike again later this year.

The central bank has recently taken other steps to tighten credit, including action on reserve requirements, prompting some banks to either reduce loan limits or even stop offering loans. Last Saturday the bank raised the maximum interest rate on credit card cash withdrawals.

The rate decision was taken just over a week before nationwide local elections, where Erdogan's AK Party is trying to win back key cities like Istanbul. Tighter fiscal policy is expected after the vote, compounding economic pain for Turks after a years-long cost-of-living crisis.

(Reporting by Ezgi Erkoyun, Ece Toksabay, Writing by Daren Butler; Editing by Jonathan Spicer)