On a structural basis, Turkey has consistently been one of the most vulnerable economies to a currency crisis in light of considerable external vulnerabilities, and was flagged again in VP’s September thematic update of our debt and currency crisis framework. However, during 2017, leading indicators of growth actually held up and Turkish growth accelerated (bottom right chart). Today, our LEI is starting to roll over, while inflation is currently running at 11.9% YoY, more than double the official target for last year. For the time being the CBRT seems indifferent, with the one-week repo anchored at 8.00%.

However, continued lira depreciation is fanning the flames of inflation, both by raising the general price level of imports and, more specifically, compounding the impact of rising global oil prices. The local currency price of oil increased 45% in the 12 months to November, and around 200% over the last two years. In addition, nominal M1 money is growing at over 20% annualised and comes in at a hefty 8% when deflating by CPI. While the market still expects policy rates to remain anchored (bottom right chart), continued price rises or a precipitous lira sell-off would break this spell and force the CBRTs hand.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception