Türkiye's central bank chief on Thursday told investors that 2024 would be a year of disinflation, stressing determination to curb the pace of price increases, while anticipating the completion of the monetary policy tightening cycle as soon as possible.
"The path of disinflation is not just a projection; it is our measure of success. We are determined to achieve this," Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan told the meeting with foreign investors in New York, where she delivered a full day of presentations.
The inaugural "Investor Day" event attracted over 200 high-level representatives from the world's largest investment funds, with a combined size exceeding $50 trillion.
During the meeting held at JPMorgan Chase headquarters, Erkan delivered a presentation on monetary policy and inflation outlook. The meeting also featured the virtual participation of Treasury and Finance Minister Mehmet Şimşek, who addressed questions from investors. Presentations on financial markets, Turkish assets, and banking were also made.
Foreign inflows rise
Data released on Thursday by the Institute of International Finance showed foreign investors added some $5.4 billion (TL 162.52 billion) in exposure to debt and equity portfolios in Türkiye in the last two months of last year, the largest such inflow in five years.
The increase in the interest in Turkish assets from abroad came as Türkiye embraced more conventional policymaking after President Recep Tayyip Erdoğan appointed a new team of technocrats following his reelection in May.
The team is led by Şimşek, a former Merrill Lynch banker who returned as finance minister, a post he held until 2018, and Erkan, a former U.S.-based bank executive. The policy shift aims to arrest inflation, reduce trade deficits, boost foreign investment, rebuild foreign exchange reserves and stabilize the Turkish lira.
Erkan has spearheaded seven consecutive interest rate hikes totaling 3,400 basis points through December to tame inflation, which neared 65% last month.
But the bank has signaled that the aggressive rate hikes – which took borrowing costs from 8.5% to the current 42.5% – could soon end. Still, it pledged to maintain tight monetary policy as long as needed.
Erkan on Thursday highlighted significant progress toward the required level of monetary tightening for establishing disinflation, citing a reduction in monetary tightening speed in December.
She emphasized the expectation to complete the tightening cycle as soon as possible.
Erkan noted a strong transition to lira deposits since September, leading to a decrease in consumption and demand for imports, resulting in an improvement in the current account deficit and reserve growth.
She emphasized a noticeable improvement in expectations and a downward trend in inflation's main indicators.
Strengthening reserves
Erkan acknowledged positive market reception to their monetary policy strategies, citing a steep fall in Türkiye's credit default swaps (CDS), a key risk measure.
"Türkiye's CDS has experienced a sharp decline, more than half compared to its peak in May. The exchange rate volatility has significantly decreased," she said.
Erkan told investors that Türkiye will prudently continue to increase foreign exchange reserves, and the process will be supported by accelerating capital inflows.
She emphasized that the simplification of the macro-prudential framework and the increase in lira deposit share would persist.
The central bank's reserves rebounded after the May vote and recently hit a record of over $145 billion. Erkan highlighted a substantial increase in capital inflows during the November-December period, exceeding $9 billion.
"Our program is working effectively, but our job will not be considered finished until sustainable price stability is achieved," she said.
"Our main commitment is to achieve disinflation. Nevertheless, we will continue to strengthen foreign exchange reserves, and we have already made significant progress in increasing reserves."
Last week, U.S. investment giants Pimco and Vanguard said they returned to the Turkish market and bought local Turkish assets recently, betting that the country will maintain high interest rates.
Remarks by top money managers at the companies show that two of the world's biggest investors, which together oversee nearly $10 trillion in assets, have grown constructive on Türkiye after the policy pivot.
The foreign interest is primed to grow, drawn by potentially outsized bond returns. Amundi, Europe's largest asset manager, has also taken a more bullish position on Turkish assets, Reuters reported.
Wall Street bank JPMorgan said Türkiye's lira was a key emerging market bet for 2024, while UBS recommended clients take a "tactical long" position on the currency in November.
Erkan said the banking sector maintained its strength and resilience throughout the monetary tightening process, indicating that their capital buffers were at sufficient levels.
She informed that lira deposits increased by TL 2 trillion over the past four months, also noting a TL 750 billion decline in a government-backed scheme safeguarding Turkish lira deposits against foreign exchange depreciation.
The government began rolling back the so-called KKM scheme and announced measures after the May elections to dissuade companies and individuals from renewing the KKM accounts, which reached a record of over TL 3.4 trillion in mid-August.
Erkan also said foreign currency deposits decreased by $3 billion. "While the share of Turkish lira deposits increased from 30% to 40%, the share of KKM fell to below 20%," she added.
"The deposit ratio is at a level where households, moving away from accelerating consumption, tend to hold their savings in lira to preserve their real value."