The Turkish Lira still appears to be kept stable by policymakers. But, rate hikes have lagged market expectations and inflation has begun to re-accelerate. Subsequently, economists at Commerzbank have revised up their USD/TRY forecast.
Inflation-FX spiral may have restarted
The current set of policies cannot be viewed to have resolved longstanding problems or restored central bank credibility.
As inflation re-accelerates, the outlook for the real interest rate will deteriorate, which will further intensify exchange rate depreciation – this is the familiar inflation-FX spiral – the reason why we significantly weakened our lira forecasts in the election aftermath.
We revised up our USD/TRY forecast path significantly, with a target of 27.00 for September 2023 and 30.00 for end-2023.
Source: Commerzbank Research
