Turkey’s CPI-based Real Effective Exchange Rate (REER) index slightly declined to 91.38 in June from 91.47 in May, the highest level since December 2016, central bank data showed on July 4.

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 recovered against the USD after the USD/TRY rate tested historically high levels of above 3.90 in January. The currency was lately testing below the 3.50 level against the USD in parallel with appreciation in other emerging currencies.

The REER dropped to 88.17 in January, the lowest level on record, but the index was on an upward trend over the following four months until May.

The local currency had gained 0.07% d/d against the greenback to trade at TRY3.5547 as of 14:45 local time on July 4. The benchmark BIST-100 index was up 0.64% to 101,163 after testing a new record high of 101,246 at around 14:15.

The TRY has hovered around the 3.50 level against the dollar since April. However, the recent strengthening of the USD in global markets pushed the Turkish lira to above 3.55 during the early trading hours of July for the first time since May 30.

Turkey’s annual inflation rate fell to its lowest level in four months in June, easing pressure on the central bank to fight price growth. The rate retreated from 11.72% in May to 10.90% in June having hit 11.87% in April, a level which was the highest recorded since October 2008.

Markets' initial reaction to the latest inflation figure took the limited recovery as an early sign that the stabilisation of the Turkish lira in recent months is reducing pressure on prices. However, the IMF still predicts that Turkey’s CPI inflation will finish in the double digits, at 10.1%, for this year before declining to 9.1% in 2018.

S&P Global Ratings expects inflation in Turkey to moderate over the forecast horizon through the year-end of 2020, but it said in May that “given the lira's volatility, risks remain that the Turkish central bank's monetary policy response may prove insufficient to anchor its inflation targeting regime, particularly if domestic or geopolitical instability were to flare up in the coming months”.