Piotr Matys, EM FX Strategist at Rabobank, notes that the Turkey’s inflation has surged to a 15-year high of 15.39% y/y in June from 12.15% in May as inflationary pressure is mainly fuelled by the precipitous fall in the value of the lira in previous months accompanied by higher global oil prices.
“Given that inflation is set to stay well above the official 5% target until well into 2019, the bias remains firmly skewed in favour of the CBRT tightening monetary policy to prevent significant deterioration in inflation expectations. So far this year the central bank has raised rates by 500bps in total.”
“A further rise in producer prices to 23.71% y/y in June is also a major negative signal for Turkish policy makers. The prospect of the CBRT raising rates on July 24 should prevent USD/TRY from regaining the upside traction in a sustainable way.”
“The downside in USD/TRY is constrained by prevailing risk of global trade wars. The cautious approach towards Turkish assets can be also attributed to market concerns about the central bank’s independence.”
“While the emergency hike of 300bps on May 23 followed by higher than expected 125bps move on June 7 proved that the CBRT can act decisively, it will take time to restore confidence amongst foreign investors. Another rate hike on July 24 would be yet another important step in the process of rebuilding central bank’s credibility.”
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