Inflation and Interest Rates: A Stalwart Duo in the Macroeconomic Agenda
As the year comes to a close, financial markets in Turkey are focused on interest rates and inflation data, while abroad, the policies of the Fed and the new Trump administration are expected to be decisive for the markets. Dr. Namık Kemal Gökalp, Chairman of Hedef Holding's Board of Directors, shared his expectations for the markets in 2025.
Interest rates and inflation dynamics continue to be determinants in Turkey's financial markets. The process of real appreciation of the Turkish Lira (TL) is driving investors away from foreign currency deposits, while the stock market needs a new catalyst to trigger a rise. Globally, Trump’s policies and the Fed's interest rate movements are anticipated to be critical in terms of global inflationary risks. Dr. Gökalp provided insights regarding expectations for a sustainable decrease in inflation and the effects of interest rate policies.
“Real Appreciation of TL Could Continue” “Our main agenda in macroeconomics is shaped around the inflation-interest equation. While inflation is declining in Turkey, it is expected that interest rates will be managed to provide real returns above inflation. This process signals that the theme of real appreciation of the TL may continue in the upcoming period. This may sustain the tendency of domestic investors to convert their foreign currency deposits.”
“A New Catalyst Needed for the Stock Market” Regarding the stock markets, 2024 has been a year in which foreign investors have moved towards net outflows, while domestic investors have focused on fixed income instruments. Although a new expectation was created in the stock market following the central bank's signal for interest rate cuts, a new catalyst is necessary to trigger a rise. The lifting of the short-selling ban before the year ends could increase trading volumes in Borsa Istanbul and bring a new balance to the market. An increase in liquidity would positively affect the market, but it may not be sufficient on its own.
“The Worst May Be Behind for Balance Sheets” On the foreign investor side, the removal of the short-selling ban will surely have a larger impact than just that; the opening of swap channels will also be significant. Although foreign investors have moved towards net outflows throughout the year, weekly inflows were observed during certain weeks in 2024. The disruptive impact of inflation accounting on balance sheets was particularly felt in the stock market. In this respect, the continuation of a tight monetary policy leading to a sustainable decrease in inflation suggests that the worst may be behind for companies in the stock market. With the upcoming gradual interest rate cuts, money market funds, which have shown record growth for some time, could reach 1.2 trillion TL, encouraging interest in equity and equity funds or alternative investment funds. However, this should not imply a rally similar to those seen in 2021-2022. Therefore, 2025 will be another selective year for the stock market, as it was in 2024.
“Global Inflationary Risks Are Looming” On the other hand, the policies implemented during the second Trump administration will be decisive for the trajectory of the global economy. The tariffs to be imposed on international trade and their effects on inflation in the U.S. should be closely monitored. These moves are likely to weaken the hand of the Federal Reserve, making interest rate cuts slower than anticipated. Signals from the Trump administration to increase import tariffs on countries like Canada and Mexico could lead to price hikes, particularly in the iron and steel sectors. A third risk of a global inflationary process should not be overlooked. Thus, it is essential for investors to diversify their portfolios by distributing risks. In this regard, the increasing variety of funds in recent years can meet investors’ needs. It is important to diversify portfolios with alternatives such as liquid fixed-income funds, low-risk arbitrage funds, and domestic and international equity funds.