(Bloomberg) -- Turkey’s central bank appeared to defy President Recep Tayyip Erdogan by jacking up rates more than expected to lift the flagging lira, capping a day of chaos that started with a ban on conducting business in dollars and euros.

The country’s Monetary Policy Committee raised the one-week repo rate by 625 basis points to 24 percent, almost double expectations in a Bloomberg survey. The lira, among the world’s worst performers this year, jumped 2.5 percent against the dollar.

The move came just hours after Erdogan triggered tumult by repeating demands for lower borrowing costs after issuing a decree curtailing the use of foreign currencies in domestic transactions. The independence of monetary policy has been in doubt since Erdogan pledged in his election campaign this year to exert more control over the central bank.

“This massive rate hike is going to stabilize the Turkish lira,” said Bernd Berg, a strategist at Woodman Asset Management AG in Zug, Switzerland. “With a central bank that has gained in credibility by showing its independence, Turkish assets are poised to recover in the short-term.”

The Borsa Istanbul 100 Index rebounded, rising as much as 1.8 percent led by Turkiye Garanti Bankasi AS and Akbank TAS, the nation’s largest listed lenders. But the rally offered little comfort to thousands of businesses now struggling to come to grips with the snap restrictions on foreign currencies, which his government has yet to explain.

‘Total Chaos’

Erdogan’s decree makes the lira the only currency that can be used in most contracts concluded between Turkish entities for any kind of product or service. Many of his own government’s largest contracts, including for building motorways and operating turnpikes, bridges and airports, are currently priced in dollars or euros.

Some agreements will be exempt from the new rules under conditions to be specified by ministries, according to the decree, which didn’t elaborate. All others that are either priced in or indexed to foreign currencies will have to be amended within 30 days.

That decree will create “total chaos" and be impossible to implement in the given time frame, said Hulusi Belgu, head of the national organization of shopping malls. His members have about $15 billion in collective debt and price about 70 percent of all their rent contracts in a foreign currency.

“How will this debt be repaid if contracts are converted to liras?" Belgu asked by telephone.

Inflation Bouts

It’s common in Turkey, a country that’s long struggled to contain inflation, to index prices in contracts for everything from cars to legal services. About half of the Turkish banking system’s deposits are in foreign currencies and companies have racked up $330 billion in foreign debt, leaving a foreign-exchange shortfall of $216 billion.

The lira had lost 40 percent against the dollar this year, buffeted by government pressure on the central bank not to raise rates and political spats with major partners including the U.S. Earlier on Thursday, Erdogan, a dogged contrarian on monetary policy, reiterated calls for lower rates during a speech in the capital Ankara -- just after the decree and before the rate meeting.

The president called fluctuations in the economy “fake" and criticized the central bank for failing repeatedly to meet its inflation target, saying that those who claim higher interest rates cause inflation -- the textbook view -- “don’t know this business."

But in the end, it was monetary orthodoxy that carried the day, driving the national currency to its biggest gain in almost a month.

--With assistance from Harumi Ichikura.

To contact the reporters on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net;Ercan Ersoy in Istanbul at eersoy@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net, ;Benjamin Harvey at bharvey11@bloomberg.net, Brad Cook

©2018 Bloomberg L.P.

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