A tram passes shoppers as it travels along Istiklal Street in the Beyoglu district of Istanbul, Turkey, Tuesday, December 19, 2023.
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With inflation declining in most of the world's major economies, the staggering price hikes continue to trouble citizens in Turkey.
The country's inflation rate rose to 64.8% year-on-year in December, compared to 62% in November. This was slightly lower than the 65.1 percent forecast of economists polled by Reuters. The inflation rate fell on a monthly basis to 2.9% from 3.3%.
Turkish inflation peaked at 85.5% in October 2022. The Turkish lira has seen a sharp deterioration, increasing the cost of imports and eroding the salaries of many foreign workers in the country who send money abroad.
This came at a time when the Turkish Central Bank adhered to a controversial monetary policy of lowering interest rates, which is led by President Recep Tayyip Erdogan.
However, the central bank made a sharp change in June when it began raising interest rates under its new governor, Hafiz Gay Ercan. It has since been raised from 8.5% to 42.5%.
The central bank's last meeting in December achieved an increase of 250 basis points, less than the last increase of 500 basis points.
Nicolas Farr, emerging European economist at Capital Economics, said in a research note at the time that the central bank had not closed the door on a tightening cycle. It also expected another increase of 250 basis points at its next meeting on January 25.
Heading to the climax?
Inflation has been rising since June, but market watchers say this cycle should peak by mid-2024.
In a new emerging markets sentiment survey by HSBC, Turkish bonds have been highlighted as a preferred investment for the first time in many years, according to the bank's global head of emerging markets research, Murat Ulgen.
That reflects the central bank's increasing credibility, Ulgen told CNBC's “Squawk Box Europe” on Wednesday.
“Of course, inflation is still high, but it is losing its successive monthly momentum, and it will likely reach its peak very soon over the next few months, or quarter, and will start to decline,” he said, adding that the central bank was likely to offer “real interest rates.” “too large” on an ex ante basis – they are created before the actual inflation rate is known.
He added that investors are looking beyond the current path of inflation and see opportunities in currency trading, especially as the lira stabilizes.
But the current level of interest rate hikes is unlikely to push the central bank to meet its end-2024 inflation target of 36%, according to Silva Demiralp, a professor of economics at Koç University.
Instead, Demiralp and her colleagues expect a reading closer to 50%, with inflation peaking at around 75% mid-year due to the cumulative effect of rate hikes and base effects.
“The starting point was a very overheated economy, and the resulting tightening may not be enough” to reach the 36% target, she told CNBC's “Capital Connection” on Wednesday.
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