Turkish lira vulnerable to additional weakness in 2023

The conflict in Ukraine reinforces downside risks for the Turkish lira according to MUFG Bank. The bank forecasts USD/TRY at 15.250 by the end of the second quarter and at 16.000 by the third quarter.

Key Quotes:
“The lira has re-weakened against the US dollar over the past month undermined primarily by the negative fallout from the Ukraine conflict.”

“The disruption of commodity and energy supplies from Russia is putting upward pressure on prices. The price of Brent has risen back above USD100/barrel. Our oil analyst expects the price of oil to rise further in Q2 and remain at higher levels through the rest of this year compared to last year’s average of USD71/barrel. The higher import bill will increase the likelihood that Turkey records a wider trade deficit.”

“Higher commodity and energy prices will also exacerbate worrying inflation dynamics in Turkey. Inflation pressures were already extreme prior to the Ukraine conflict with the headline rate rising to 54.4% in February. Building upside risks to the inflation outlook will further undermine confidence in current policy settings.”

“The CBRT provided no signal that it was prepared to tighten policy in response to higher inflation, and we continue to believe that current settings remain way too loose. The real policy rate after adjusting for inflation continues to move deeper into negative territory. It stands in contrast to the Fed’s updated plans to deliver larger rate hikes to front–load tightening. It leaves the lira vulnerable to further weakness in the year ahead.”