Turkish central bank chief on Wednesday said interest rate hikes have helped lower inflation expectations and improved visibility on prices, attracting Western fund inflows that have boosted foreign exchange reserves.
Interest in Turkish lira deposit accounts and assets has increased since June, Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan told a meeting at the Istanbul Chamber of Industry (ISO).
“We believe that the time has come for a transition to the Turkish lira. We see the most evident reflections of this shift in deposit developments,” she noted.
Erkan, echoing the message by the central bank’s monetary policy committee last week, also said its tightening steps would be completed soon.
A former Wall Street banker, Erkan listed a series of long-term benefits of the aggressive rate hikes since she took the bank’s reins in June and began orchestrating a shift toward more conventional monetary policymaking.
The new administration, led by Treasury and Finance Minister Mehmet Şimşek, reversed a yearslong easing cycle and delivered aggressive tightening in a bid to tackle the country’s long-term inflation issue.
Since June, the central bank embarked on a 3,150 basis-point tightening cycle – including hikes of 500 basis points in each of the last three months.
Based on preliminary readings, Erkan said monthly inflation continued to slow in November, adding that the lira currency’s more stable foreign exchange rates will also help cool price rises.
Annual inflation is running above 61% and is expected to rise through May next year before cooling.
“Our priority is disinflation, and the most crucial element in the fight against inflation is stability, accepted by society and price setters,” the governor said.
“Signs of improvement in expectations began to emerge with the implementation of policy decisions after the rise in inflation.”
She cited a positive shift in pricing behavior, with notable reductions in the prices of automobiles and white goods for the first time.
“We are observing signs of a slowdown in rent increases in major cities; these indicators will increase as monetary transmission continues,” Erkan noted.
“Leading indicators for November suggest that the decline in monthly inflation will persist.”
With the contribution of exchange rate stability, Erkan anticipated a reduction in monthly inflation shocks and an increase in cost predictability.
“Exchange rate stability will have a positive impact on monthly inflation,” she added.
“We will transition from a period where companies change prices every two weeks to a period where prices change over a longer duration.”
Erkan highlighted the increased predictability in the markets and the "very strong upward trend" in reserves, which she says has been influenced not only by Gulf countries but also by Western fund inflows.
Erkan said that international investors are also beginning to believe that "it is time to transition to the Turkish lira," as observed through reports, expectations, interest, and inflows.
"We see actual inflows increasing with the growing demand for our country's assets," she noted.
The total reserves of the central bank are estimated to have risen by $2 billion to a historic peak of $136.5 billion last week, bankers’ calculations showed Tuesday, maintaining an upward trajectory since after the May elections.
The earlier record in the reserves, which rose to $134.5 billion in the week of Nov. 17, the highest level since September 2014, stood at $135.96 billion in December 2013.
Bankers’ calculations suggest a $38 billion increase in total reserves from June to last week, rising from $98.5 billion at the end of May following the elections.
“In the coming period, we will support the development of external demand for Turkish lira assets by ensuring the permanence of the increase in our reserves, with an understanding that establishes the best conditions for our country,” Erkan said.
Some foreign investors, including European giant Amundi, have begun tentatively returning to Turkish assets.
On Tuesday, Amundi, Europe’s largest asset manager, said it had been impressed by the country’s turnaround efforts since its mid-year elections.
The Paris-based firm, which has about $2 trillion worth of assets under management, is yet to go all in, given the lira’s ongoing depreciation. However, it says it has taken its first step toward it by reversing long-held bets against the currency.
“We have started to cover our underweight in Turkish lira a few weeks ago,” Sergei Strigo, Amundi’s co-head of Emerging Markets Fixed Income, told Reuters, referring to the process of taking a more positive view on the currency.
Strigo said last week’s 500 basis-point interest rate hike was “all very positive” and a sign of Türkiye’s seriousness in tackling its inflation problem.
“We are not yet ready to increase the allocation (in the lira), but it is definitely on our radar screen.”
Recent reports, including analyses from international institutions like Deutsche Bank and JPMorgan, also suggested that lira-denominated investment instruments will stand out among developing country markets in 2024.
Last week, CBRT officials said they had started observing fund inflows into the lira from large-scale institutional investors based on the United States West Coast. They indicated that ongoing discussions suggest these inflows will continue.
The central bank has scheduled an “Investor Day” event for Jan. 11 in New York, adopting this format for the first time. While the bank regularly organizes similar meetings, the theme of “Investor Day” will be introduced.
