WASHINGTON — Moody's said recently that it has upgraded Turkey's credit rating on improved governance and progress on inflation, while maintaining the country's outlook as "positive."

The shift came as Turkey battles a cost-of-living crisis that prompted President Recep Tayyip Erdogan to drop his opposition to interest rate hikes as a means of tackling inflation.

In June, the country's annual inflation rate stood at 71.6 per cent — with consumer price hikes easing after hitting a peak of 75.45 per cent in May.

Turkey's sovereign credit rating was lifted from B3 to B1, Moody's said on Friday.

This was largely due to "improvements in governance, more specifically the decisive and increasingly well-established return to orthodox monetary policy", the agency added.

"Inflation and domestic demand have started to moderate, giving us greater confidence that inflationary pressures will ease significantly over the coming months and into 2025," Moody's Ratings said.

It noted that Turkey's central bank has been boosting the credibility of monetary policy, and this has been restoring confidence in the Turkish lira.

But it warned that "political risk remains a rating constraint".

A staggering surge in consumer prices and a collapse of the Turkish lira have been deemed responsible for the severe electoral setback inflicted on Erdogan's AKP party in March's municipal elections.

For now, Moody's said the balance of risks remains "skewed to the upside".

As the effectiveness of monetary policy rises, macroeconomic stability and stronger institutions could allow the country's strengths — like its diversified and competitive economy — to come to the fore, its report added.

This is especially true if the shift in economic policies were coupled with structural changes that cut the risk of long-lasting inflation shocks, Moody's said.