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Turkish Lira Weakens As May Inflation Spikes

June 3, 2020 at 17:24 by Andrew Moran

Various TRY banknotesThe Turkish lira is weakening against several major currency rivals midweek, primarily caused by the spike in inflation last month that may give policymakers enough fuel to cut interest rates. Investors are also going sour on the lira on Wednesday on new data that suggests the central bank ramped up foreign currency borrowing in April to stabilize the lira.

According to the Turkish Statistical Institute, the consumer price index (CPI) surged 1.36% last month, up from the 0.85% increase in April. The annualized inflation rate stands at 11.39%, higher than the median estimate of 11%. The core inflation rate, which excludes food and energy, increased from 9.93% in April to 10.3% in May.

The producer price index (PPI) advanced 1.54% last month, up from 1.28% in the previous month. Producer prices did fall to 5.53% year-on-year, which is the lowest producer inflation in six months due to slumping manufacturing and mining prices.

In other economic data, the Istanbul Chamber of Industry manufacturing purchasing managers’ index (PMI) strengthened to 40.9 in May, up from 33.4 in April.

If the Monetary Policy Committee does see deflation in more pockets of the economy, officials say they would pull the trigger on more rate cuts. Last month, the central bank slashed its benchmark one-week repo rate by 50 basis points to 8.25%. Analysts forecast another rate cut of 100 basis points at its next policy meeting later this month.

Real interest rates have been parked in subzero territory for lira depositors since late last year.

Meanwhile, central bank data show that the nation’s state banks sold approximately $44 billion of hard currency in the first four months of 2020 to support the lira, which has lost 12% of its value year-to-date. Turkey has sold nearly $88 billion since the start of 2019. At the same time, the central bank revved up foreign currency from local financial institutions to a record high of $5 billion in April. In total, short-term borrowing, a type of currency swap, climbed to $35.5 billion.

Since crashing to an all-time low of 7.2 against the greenback, the lira has rebounded to around 6.7.

The USD/TRY currency pair rose 0.52% to 6.7477, from an opening of 6.7132, at 17:19 GMT on Wednesday. The EUR/TRY jumped 1.11% to 7.5805, from an opening of 7.4989.

If you have any questions, comments, or opinions regarding the Turkish Lira, feel free to post them using the commentary form below.

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