On the back of last month’s sell-off in the TRY as well as rising oil prices, inflation climbed markedly in May, with the headline figure up to 12.2% y/y (10.9% in April) and core inflation up to 12.6% y/y (12.2% in April). The rise in inflation was relatively broad-based, with the large price components food inflation (up from 8.8% in April to 11% in May) and transportation inflation (up from 16.5% to 20%) each adding +0.5pp to the headline figure in May. Meanwhile, the Manufacturing PMI dropped further to 46.4 points in May (48.9 in April), driven by an ongoing slowdown in new orders, indicating a marked decline in the health of the manufacturing sector. These two bad news at the start of this week reversed the tempo¬rary recovery of the TRY following the two decisive monetary policy measures at the end of May (see also WERO 30 May 2018). The TRY has hovered around 4.60 vs. the USD so far this week, down from 4.48 at the end of last week. We believe that another rate hike in the region of 300bp is needed in order to calm down investors and stabilize the currency more permanently. However, it is unlikely to come at the next meeting tomorrow, given the weak production outlook and the relative improvement of the TRY from its all-time low of 4.92 vs. the USD on 23 May.
