USD/TRY: Lira may appear stable for now, but fundamentals are deteriorating – Commerzbank

Inflation expectations in Turkey have surged to 58%. In the view of economists at Commerzbank, the lira remains vulnerable despite appearing stable for the moment.

When expectations get un-anchored 

“Even as inflation has reached 70% in the absence of central bank targeting, inflation expectations are swiftly catching up because there is no ‘anchor’ to convince markets that inflation will strictly converge back to the target level over the medium-term. In CBT’s latest survey, expectations for end-2022 rose from 46% to 58%.”

“Each time inflation expectations rise, this provides the impetus for the next round of actual price increases. In the absence of targeting, there is no upper-bound to this process.”

“The lira may appear stable for now, but fundamentals are surely deteriorating.”