Turkey’s CPI-based Real Effective Exchange Rate (REER) index fell to a record low of 77.85 in May from 81.52 in April, central bank data showed on June 5.

The index stood at 102-103 at the beginning of 2017 before gradually falling to around the 90 level by the end of the year. This year, it saw a previous record low level in March before hitting a series of record low levels in the following two months.

A higher REER points to the Turkish lira (TRY) gaining value in real terms against foreign currencies while a decline in the index indicates it has lost real value.

The TRY was trading at 4.6144 against the USD as of 17:50 Istanbul time on June 5.

The record high level of TRY4.9294 to the dollar was recorded on May 23.

The lira’s immediate destiny clearly depends on the next Monetary Policy Committee (MPC) meeting to be held on June 7 which will decide if the emergency interest rate rise of 300 basis points (bp) introduced on May 23 should be followed by more tightening.

On June 4, May's inflation came in at 12.15% y/y, a level significantly worse than expectations, but the market reaction was positive thanks to expectations weighing towards a further rate hike.

However, some market observers, including Capital Economics, expect the MPC to leave the key policy rate unchanged at 16.50%.

“[The May inflation] figures increase the chances of an interest rate hike [on June 7]. Following the lira’s sell-off last month, policymakers have been keen to emphasise their commitment to tackling high (and increasingly unanchored) inflation. But past experience suggests that pressure from President Recep Tayyip Erdogan to keep interest rates down means that the central bank is unlikely to react to the [May inflation] figures,” Jason Tuvey of Capital Economics said on June 4 in an e-mailed note.

A Bloomberg survey showed eight of 14 economists expecting the central bank to leave its key rate unchanged, and the other six anticipating a rate increase of at least 50bp.

Turkish government bonds fell for the fifth day on May 5 with the yield on 10-year government bonds jumping 19bp to 15.04%, not far off the record high of 15.30% recorded on May 23.