Turkey’s official consumer price index (CPI) inflation stood at 38% year on year in June versus 40% y/y in May, the Turkish Statistical Institute (TUIK, or TurkStat) said on July 5 (chart).

The official inflation rate as measured by TUIK peaked in October at 86%, which was the highest headline rate posted by Turkey since the 91% registered in June 1998. With the advent of December, the base effect from a year previously came into effect, pulling inflation down.

At 38%, Turkey remains in 13th place in the world inflation league.

The Istanbul-based ENAG inflation research group of economists, meanwhile, released an inflation figure of 108.6% y/y for June. The ENAG figure calculated for May was 109% y/y.

TUIK also gave an official figure of 40% y/y for producer price index (PPI) inflation in June.

In parallel with the lira depreciation, gasoline prices in Turkey have risen by 35% since the beginning of May. Diesel prices are up 33%.

In May, the central bank left its expectation for end-2023 official inflation unchanged at 22% (upper boundary: 27%).

The guidance was based on the assumption that the lira would not experience another crash.

As of July 5, the USD/TRY rate in the interbank market was up by 34% to TRY26.1 from 19.49 on May  4. The latest record high of 26.25 was registered on June 6.

Previously, the rate jumped by 6% day to day into the 23s on June 7 and moved up to the 26s following the rate-setting meeting held on June 22.

28 and 30 are the levels that have been pronounced for the upcoming levels in the USD/TRY chart.

On July 27, newly appointed central bank Governor Hafize Gaye Erkan will release her first inflation report and the central bank’s updated inflation forecasts.

Despite the Erdogan regime’s latest retreat into economic orthodoxy, Turkey’s FX market is still not free. Officials are still controlling the interbank market via government-run banks.

Amid the booming lira supply and hard currency outflows via unprecedented trade deficits, these officials have only managed to keep a slippery grip on the lira by strong-arming bankers into blocking (non-capital controls) and suppressing (macroprudential measures) domestic FX demand. Also supportive are unidentified inflows and other assistance from “friendly countries”.

As the lira has been lately allowed to depreciate, the central bank’s net FX reserves rose to $9bn as of June 23 after turning to a positive $0.5bn as of June 16. A record low was registered at minus $6bn on June 2.

The gross reserves rose from $103bn as of June 16 to $108bn as of June 23. The figure stood at $130bn as of February 3 and at $98bn as of May 26.

The recovery in the reserves does not mean that the central bank has lifted its control in the FX market. It is just because inflows (rediscount credits, export revenues etc.) are bigger than FX sales via public banks.

Sentiment on the global markets remains turbulence-free. Turkey’s five-year credit default swaps (CDS) are moving around the 500 level, while the yield on the Turkish government’s 10-year eurobonds is around the 9% level.

On May 24, unnamed sources told Bloomberg that Turkey’s central bank had asked some local lenders to buy the country’s dollar bonds to prevent a CDS spike.

On June 3, Turkey’s re-elected president, Recep Tayyip Erdogan, named market favourite Mehmet Simsek as finance minister.

On June 22, the central bank’s monetary policy committee (MPC) hiked its policy rate by 650bp to 15%. The market had anticipated a rate of about 25%.

Against the front-loaded expectations, the MPC said that the policy rate will be hiked gradually and normalisation (regarding non-capital controls and macroprudential measures) will also be delivered in a gradual manner.

The central bank will also continue to support strategic investments. It acts as a development bank with extending direct loans to companies under the Advance Loans Against Investment Commitment (Yatirim Taahhutlu Avans Kredisi/YTAK) scheme.

If the rate hikes are delivered gradually, the portfolio inflows into Turkey will be limited. The finance industry will hold back until the policy rate reaches its peak.

The next MPC meeting is scheduled for July 20. As things stand, an additional 5 pp hike appears to be on the way.

Essentially, Turkey’s policy rate still remains idle on the sidelines, but the central bank is back in the game. The policy rate is also subject to the “gradual” path, meaning monetary policy is still conducted via macroprudential measures and non-capital controls. Here the word “gradual” also applies. They are to be lifted in a “gradual” manner.

Prior to the latest U-turn in favour of the orthodox, a lira devaluation looked a must. Erdogan was in a position to find some fresh FX supply, with rate hikes on the cards should the unidentified capital flows and “friendly country” channels not work.

At the end of July, Erdogan is to visit Saudi Arabia, Qatar and the UAE. The over-riding aim is to find some FX.

The Turks, meanwhile, are still piling up cryptocurrency, cars and gold. The KKM FX-protected deposits scheme rose to TRY2.71trillion as of June 23 from TRY2.63 trillion as of June 16, while the US dollar-denominated amount declined to $109bn thanks to the lira depreciation.

As of June 23, the KKM accounts for 24% of total deposits. The share of FX-linked deposits stood at 42%. Overall dollarisation stood at 66%.

To help break FX demand, the government has also permitted local banks to introduce higher lira deposit rates. As of June 16, the weighted average lira deposit rate with maturities of up to three months reached 41%.

Consumer loan rates are also moving up, while commercial loan rates remain flat.