Turkey economy: Quick View – Inflation spurt triggers Turkish lira sell-off

Event

The annual rate of consumer price inflation accelerated from 6.5% in May to 8.3% in June, according to the Turkish Statistical Institute (Turkstat). Month on month, consumer prices rose by 0.76%. The data release triggered heavy selling of Turkish lira-denominated assets on July 3rd.

Analysis

The jump in consumer prices in June was driven largely by higher food prices (up 1.8% month on month, which partly reversed a sharp fall in the previous month), pushing the annual rate of increase well above the Turkish authorities’ central target of 5% at the end of 2013 and above the upper limit of the fluctuation band of +/-2 percentage points. We expect that higher inflation and renewed currency weakness will eventually force the Central Bank of Turkey to raise its key short-term policy interest rate, the one-week repurchase (repo) lending rate, which was reduced as recently as mid-May 2013 to its current low level of 4.5%.

We had expected the annual rate of inflation to rise in June and subsequent months, reflecting both a low baseline (consumer prices fell month on month in June and July of last year) and a weakening of the lira from mid-May 2013. However, the acceleration was much sharper than anticipated, denting expectations that the annual inflation rate would slow later in the year, assuming only moderate increases in indirect taxes and administered prices.

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