Macro and Politics

* The CPI-based real effective exchange rate (REER) index increased to 105.96 in July, while the June reading was revised up to 105.57 from 104.9. As a result, the July CPI-based REER implied a 0.4% monthly real appreciation of the Turkish lira, perfectly in line with our calculations. Over the same period, the PPI-based REER rose by 0.43 points to 101.5. A breakdown of the components driving the CPI-based REER shows that the US dollar appreciated by an average of 1.76% against the Turkish lira in July, while the euro gained 0.77% on average. Over the same period, monthly CPI inflation came in at 1.78%, while PPI increased by 1.52%. Higher domestic inflation exerted upward pressure on the CPI-based REER, whereas changes in the global CPI basket and the nominal currency basket worked in the opposite direction. Overall, the upward impact of domestic inflation outweighed these offsetting factors, leading the CPI-based REER to increase by 0.4% in July, in line with our estimates.