The Turkish Lira is falling today after having appreciated somewhat over the last few days in the course of the global corona relaxation. The US Dollar vs. the Turkish Lira has been rising from 6.70 to 6.76. The reason for this is the data on inflation in Turkey. This data was published today by the state statistics office. Consumer prices in May rose by 11.39 percent year-on-year. This compares to 10.94 percent in April. Lately, inflation in Turkey has cooled down somewhat, but now this unexpected increase! As a result, the gap between the inflation rate and the lower key interest rate (last reduced from 8.75 percent to 8.25 percent on May 21) is widening again. This is a deterrent especially for foreign investors who want to invest money in Turkey.
Here is the year-on-year increase in inflation for the last twelve months:
Here we see the course of inflation in Turkey since 2018, as a chart from the statistical office:
Inflation development in the Corona crisis different from that in Euroland
Wait a minute. Inflation is rising in Turkey? In Europe, it’s rushing toward zero at the moment. The dramatic drop in oil prices in March and April is bringing the overall average consumer price down. And in Turkey? The detailed data show that food prices are even above average at 12.87 percent, as are health care costs at +13.07 percent. Transport costs (oil crash noticeable?) are still rising by 6.69 percent, where they are clearly in negative territory in Europe (see here). Does this show the effect of a too low key interest rate, which fuels inflation in Turkey?
Game changer for the Turkish Lira?
In any case, the Turkish Lira reacts with a certain devaluation. Just think. The key interest rate had been lowered from 24 percent to 8.25 percent, in numerous steps. Well, inflation also fell significantly, but apparently the interest rate was lowered too much to provide the economy and consumers with relatively cheap money. The forex market is also reacting today, as a figure of around 10.90 percent was expected for today, and an 11.39 percent increase in consumer prices has now been reported. Now the Turkish Lira stands before the decision. The US Dollar has been showing weakness (you can see this in the basket called the Dollar Index) for the past few days, including against the Turkish Lira. But as we said, since this morning, this has changed and the Dollar is rising again against the Lira. Is this event a game changer, and the Lira continues to depreciate? Let us leave this question open.