The Turkish central bank’s monetary policy committee (MPC) on January 25 announced a policy rate hike of 250bp, taking the benchmark to 45%, in line with market expectations (chart).

Taking into account the lagged impact of monetary tightening—which consists of eight consecutive rate increases amounting to 3,650 bp introduced since June last year by Turkey’s new economic team—the MPC assessed that the monetary tightness required to establish the disinflation course has been achieved, the committee said in a statement accompanying the announcement of the latest hike.

The MPC also stated that the current policy rate level would be maintained until there was a significant decline in the underlying trend of monthly inflation.

In the period ahead, the authority will keep employing macroprudential measures and non-capital controls to strengthen the monetary transmission mechanism.

The next MPC meeting is scheduled for February 22. As things stand, the rate-setters will stick with the 45% benchmark.

On January 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s official consumer price index (CPI) inflation officially stood at 65% y/y in December versus 62% y/y in November and 38% y/y in June.

On November 2, the central bank hiked its forecast for end-2023 official inflation to 65% from the 58% given in the July inflation report. Also, the upper boundary was moved up from 62% to 68%.

Moreover, the central bank currently anticipates that official inflation may peak in the 75-80% range in May this year, up from the 70% projection it gave last July.

The authority sees official inflation at 36% at end-2024.

On February 8, the central bank will release its next inflation report and updated inflation forecasts.

The global markets are still in a new year mood of positivity. Through February, the positivity may sustain.

Turkey’s five-year credit default swaps (CDS) remain above the 300-level, while the yield on the Turkish government’s 10-year eurobonds remains below the 8%-level.

The USD/TRY rate is, meanwhile, still heading north, with the lira down 38% versus the dollar in the year to date and 80% down in the past five years. On September 21, the pair once again broke through the horizontal barrier set at the 27.00-level. The latest record high, registered on January 24, is 30.3589.

Since December 15, the Turkish government has returned to its ‘five/10 kurus (Turkish cents, pronounced as kurush) devaluation per day policy’. As of January 25, the daily tranche was being dug at around the 30.30-level. The annual rise in the USD/TRY pair rose to 61%.

Chart by @e507: Since the beginning of 2024, the headlines suggesting “records” in Turkey’s FX reserves have disappeared.

Following the local elections to be held at the end of March, with Turkey’s policy rate at its peak, the course of the USD/TRY pair will be observed.

When the northward pull on the pair ends, the moment will be seen as signalling the beginning of portfolio inflows and the opening of the window for slowly building up lira papers.

Ahead of May, when official inflation will peak, the beginning of rate cuts (currently expected by many analysts in 4Q24) will be discussed.