Turkish lira recovery stalls after three-day streak, eyes turn to inflation

ISTANBUL: Turkey's lira stalled in its recovery on Thursday, backtracking after three straight days of advances against the dollar, as investors looked ahead to inflation data next week that could boost expectations of another rate hike.

The lira's rare recovery this week - it is on track for its best weekly performance for in almost seven years - comes after the central bank hiked interest rates by 3 percentage points at an emergency meeting last week to defend the currency. The bank has also said it will move to a single rate to simplify policy, something long sought by investors.

But the market remains cautious. Concerns about President Tayyip Erdogan's grip on monetary policy and about the bank's ability to tame double-digit inflation had sparked a market rout and forced the central bank (CBRT) to take emergency action.

"Now eyes turn to CPI inflation," said Muammer Komurcuoglu at Is Invest. "A higher inflation print will heighten expectations for another rate hike. If the CBRT hikes the rates again, we might see further appreciation of the lira."

The lira - which is currently down around 15 percent this year - stood at 4.4900 against the dollar at 1143 GMT, weakening 0.7 percent from Wednesday's close. It is on track for its best weekly performance since late 2011. Last week it hit a record low of 4.9290. The main stock index was down 1.06 percent at 102,757 points.

Turkey is due to release May inflation data on June 4. A Reuters poll showed this week that monthly inflation is likely to jump 1.45 percent in May.

That would translate into an annual increase of nearly 12 percent, and likely lift expectations of another rate increase at the CBRT's next policy-setting meeting on June 7.

'BEHIND THE WHEEL'

"The central bank was criticised that it stood silent and was behind the curve recently," said Sebastien Barbe, head of emerging market research and strategy at Credit Agricole.

"It would be appropriate for the central bank to do another rate hike in the next meeting in order to show that it is behind the wheel and taking care of the lira currency."

Finance Minister Naci Agbal on Thursday said Turkey would also tighten fiscal policy as it did with its monetary policy, adding that the two needed to be in harmony.

Agbal also told broadcaster Bloomberg HT that growth in the first quarter of 2018 was strong and that April and May indicators showed a balancing outlook for the economy.

Debt restructuring and construction amnesty measures introduced earlier this year will generate a 40-45 billion lira ($9-$10 billion) income, preventing upward risks to Turkey's budget deficit, he said.

Data showed the trade deficit had widened 35.6 percent year-on-year in April to $6.69 billion.

The number of foreign visitors arriving surged 28.3 percent year-on-year in April to 2.66 million, separate data showed.