Turkish Lira Falls As Inflation Soars

Inflation SurgesFocus is back on the CBRT this week following news that Turkish inflation last month was seen rising by it highest pace in over two years, taking inflation in the country back up to almost 20%. The CBRT has been involved in a heavy, two-year battle to help curb spiralling inflation. The central bank was successful in bring inflation down from 25% highs to around as low as 15% last year. However, inflation has been steadily climbing again over recent months with TRY weakening heavily against the Dollar, taking USDTRY up to fresh, record highs.Biggest Increase in 2 YearsThe data released today shows that Turkish inflation reached 19.58% last month, up from 19.25% the month before. At this level, price are almost 400% above the central bank’s inflation target. The recent inflationary spiral comes after the former CBRT head was removed by the government and replaced. President Erdogan has made his distaste for higher interest rates very clear and following the former CBRT head’s campaign of interest rate hikes (in order to curb inflation), his successor is seen as being a proponent of lower rates, creating conditions for inflation to soar once again.The CBRT unexpectedly cut its headline interest rate by 1% last month. The move was widely criticised by those concerned about the inflationary spiral underway, drawing a clear link between the government and the central bank. While the two roles are supposed to be distinct, Erdogan’s intervention by replacing the former CBRT head is a clear sign of how much influence the government has on the CBRT.Energy Crisis ImpactThe global energy crisis and supply chain issues stemming from COVID is adding further fuel to the situation. Soaring fuel prices and a distribution shortage have created uncomfortable conditions for central banks around the world. The key question now is just how far Erdogan is prepared to let inflation run. While the Turkish president is a strong opponent of higher rates, the fall off in TRY at a time when USD is rising creates a dangerous platform for inflation to run into hyper inflationary territory from which the CBRT might struggle to correct the situation.Technical ViewsUSDTRYThe recent rally in USDTRY has seen the market breaking out of the corrective bear channel with price breaking through the former highs around 8.7921 to trade up to highs around the 9.0000 mark. While price has softened a little here, both MACD and RSI remain positive, keeping the focus on further upside in the near term.

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