Turkish inflation rises to nearly 65 further rises expected –

Turkish inflation rises to nearly 65%, further rises expected –

A tram passes shoppers on Istiklal Street in Istanbul's Beyoglu district on Tuesday, December 19, 2023.

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While inflation is easing in most of the world's major economies, staggering price increases continue to weigh on citizens in Turkey.

Inflation in the country rose to 64.8% on an annual basis in December, an acceleration from 62% in November. This was slightly below the expectations of 65.1% of economists polled by Portal. Month-on-month inflation cooled from 3.3% to 2.9%.

Turkish inflation peaked at 85.5% in October 2022. The Turkish lira experienced a sharp decline, driving up import costs and cutting into the salaries of the country's many foreign workers who sent money abroad.

This came as the Turkish central bank stuck to its controversial monetary policy of cutting interest rates, led by President Recep Tayyip Erdogan.

However, the central bank made a drastic change in policy in June when it began raising interest rates under its new governor, Hafize Gaye Erkan. They have now been increased from 8.5% to 42.5%.

The last central bank meeting in December saw a rate hike of 250 basis points, less than the recent series of 500 basis point hikes.

Nicholas Farr, emerging market Europe economist at Capital Economics, said in a research note at the time that the central bank had not yet completed its tightening cycle. He also forecast a further 250 basis point rate hike at the next meeting on January 25.

Inflation has been rising again since June, but market observers expect this cycle to peak in mid-2024.

A new HSBC emerging market sentiment survey highlighted Turkish bonds as a preferred investment for the first time in many years, according to Murat Ulgen, the bank's global head of emerging markets research.

This 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 momentum on a monthly basis and the chances are that it will peak and start to decline fairly soon in the next few months or a quarter,” he said, adding that the Central bank is expected to deliver “quite substantial real interest rates” on an ex-ante basis – determined before the actual inflation rate is known.

Investors are looking beyond the current inflation path and seeing opportunities in forex trading, particularly as the lira stabilizes, he added.

However, according to Selva Demiralp, professor of economics at Koc University, the current scale of interest rate hikes is unlikely to allow the central bank to meet its 36% inflation target for the end of 2024.

Demiralp and her colleagues instead assume a value close to 50%, with inflation peaking at around 75% in the middle of the year due to the cumulative effect of interest rate hikes and base effects.

“The starting point was a very overheated economy, and any resulting tightening is probably not enough” to reach the 36 percent target, she told CNBC's “Capital Connection” on Wednesday.