A tram passes shoppers on Istiklal Avenue in the Beyoglu district of Istanbul, Turkey, Tuesday, December 19, 2023.
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While inflation has eased in most of the world’s major economies, Turkey continues to suffer from eye-popping price increases.
The country’s inflation rate rose to an annual rate of 64.8% in December, accelerating from 62% in November. This was slightly lower than the 65.1% forecast by economists polled by Reuters. Month-on-month inflation slowed to 2.9% from 3.3%.
Türkiye’s inflation rate reached a peak of 85.5% in October 2022. The Turkish lira has depreciated sharply, increasing import costs and reducing the salaries of many of the country’s foreign workers who send money abroad.
This came after Turkey’s central bank stuck to President Recep Tayyip Erdoğan’s controversial monetary policy of lowering interest rates.
However, the central bank made a sharp change in policy in June when it began raising interest rates under new governor Hafizeh Gey Erkan. It was later raised from 8.5% to 42.5%.
The central bank’s last meeting in December decided to raise interest rates by 250 basis points, which was smaller than the recent 500 basis point hike.
Nicholas Farr, emerging Europe economist at Capital Economics, wrote in a research note at the time that the central bank had not closed the door on a tightening cycle and predicted a further 250 basis points of rate hikes at its next meeting on Jan. 25.
Inflation has been on the rise again since June, but market watchers believe the cycle will peak by mid-2024.
Murat Ulgen, HSBC’s global head of emerging market research, said Turkish bonds were featured as a priority investment for the first time in many years in the bank’s emerging market sentiment survey.
This reflects the central bank’s growing credibility, Ulgen told CNBC’s “Squawk Box Europe” on Wednesday.
“Of course, inflation remains high, but it is losing its monthly momentum and is likely to peak and start falling soon in the coming months and quarters,” he said, adding: It is likely to achieve “substantial real interest rates” on an ex-ante basis, which is established before the actual inflation rate is known.
Investors are looking at the current inflation trajectory and seeing opportunities in currency trading, especially with the lira stabilizing, he added.
However, Selva Demiralp, an economics professor at Koc University, said that at the current rate hikes, the central bank is unlikely to achieve its 36% inflation target by the end of 2024.
Rather, Demiralp and his colleagues believe that the cumulative effect of rate hikes and base effects will push inflation to about 75% by mid-year and closer to 50%.
He told CNBC’s “Capital Connection” on Wednesday that to reach the 36% goal, “the starting point is a very overheated economy, and the resulting tightening probably won’t be enough.”
