Turkish Lira Easing July Gains on Surging Consumer, Producer Inflation

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The Turkish lira is is plunging against its major currency counterparts, including the US dollar and the euro. The lira is plummeting on soaring consumer and producer inflation, despite positive economic growth in recent weeks. Could the lira begin testing fresh record lows heading into the fall? It might depend on what the central bank does in the coming weeks.

According to the Turkish Statistical Institute (TSI), the annual consumer price inflation (CPI) advanced to 18.95% in July, up from 17.53% in June. The market had penciled in a reading of 18.5%. This represented the highest inflation rate since April 2019, driven by upward pressure for food, shelter, utilities, and transportation.

On an annualized basis, price inflation rose 1.8%, higher than the median estimate of 1.54%.

Producer prices also swelled last month. The producer price index (PPI) increased to 44.92% year-over-year in July, up from the 42.89% total in the previous month. This was the biggest increase in producer prices since October 2018, buoyed by greater manufacturing, mining, and utility costs.

On a monthly basis, the PPI rose 2.46%, easing from the 4.01% jump to finish the second quarter.

This comes one day after the Istanbul Chamber of Industry manufacturing purchasing managers’ index (PMI) increased to 54 in July, up from 51.3 in June – anything above 50 indicates expansion. The PMI figures suggested mounting input cost inflation, as well as quicker gains in employment and purchasing activity.

Next week, the central bank will hold its August policy meeting, where it is expected leave interest rates unchanged at 19%. However, with skyrocketing inflation, the institution might have no other alternative but to pull the trigger on a rate hike.

Despite its weakness to kick off August, the lira had a terrific July, rallying more than 3% against the greenback. Year-to-date, however, it is still down 13%. What has happened?

Viktor Szabo, a portfolio manager at Abdrn, told the Financial Times:

“For the lira, no news is good news. Following some of Erdogan’s comments recently, there was a fear that would translate into rate cuts. It’s doing well recently because it has done so badly. There’s no one left to sell it.”

The USD/TRY currency pair jumped 0.67% to 8.4101, from an opening of 8.3541, at 13:21 GMT on Tuesday. The EUR/TRY advanced 0.7% to 9.9881, from an opening of 9.9176.

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