The Turkish central bank’s monetary policy committee (MPC) on December 21 announced a policy rate hike of 250bp, taking the benchmark to 42.50% (chart). The latest increase in the regulator's tightening cycle was in line with market expectations.

The MPC said in a statement that it would end the cycle, which has delivered seven straight months of rate hikes, as soon as possible.

The tightening process was launched in June, following the appointment of Turkey’s post-election new economic team by the Erdogan regime.

The next MPC meeting is scheduled for January 25. As things stand, it appears that the rate-setters will conclude the tightening cycle at 45% by bringing in another 250bp hike.

Beyond February, the authority will keep employing macroprudential measures and non-capital controls while awaiting the lagged effects of the rate hikes and the base effects in the official inflation series starting from June.

On December 4, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 62% y/y in November versus 61% y/y in October 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 2024, up from the 70% projection given in July.

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

The mood of the global markets is presently geared towards a new year rally. Through February, the positivity may sustain.

Turkey’s five-year credit default swaps (CDS) have fallen below the 300-level, while the yield on the Turkish government’s 10-year eurobonds has declined to below the 8%-level.

The USD/TRY rate is, meanwhile, still heading north. On September 21, the pair once again broke through the horizontal barrier set at the 27.00-level. The latest record high, registered on December 22, is 29.4157.

Since December 15, the Turkish government has returned back to its ‘five/10 kurus (Turkish cents, pronounced as kurush) devaluation per day policy’. As of December 22, the daily tranche was being dug at around the 29.20-level. The annual rise in the USD/TRY pair remains at 56%.

Following the local elections to be held in March, Turkey’s policy rate will be at its peak. The finance industry will then be welcomed in for the rate-cutting feast.

When the rate-cutting cycle begins (currently expected in Q4 2024), double returns from the rising prices of lira papers and lira appreciation will be written. Until then, 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.