Türkiye’s Real Effective Exchange Rate Drops in May Despite Inflation Surge

Türkiye’s Consumer Price Index (CPI)-based Real Effective Exchange Rate (REER) dropped to 71.11 in May 2025, down 1.05 points from the previous month, according to new data released by the Central Bank of the Republic of Türkiye (TCMB).

Meanwhile, the Producer Price Index (PPI)-based REER also declined, falling 0.36 points to 93.09.

Currency Strength Outpaces Inflation

The decline in both REER indices came despite Türkiye’s domestic inflationary pressures. Analysts attribute the drop to sharper increases in nominal exchange rates, which outpaced local price growth.

In May:

• The CPI rose by 1.53%

• The PPI climbed by 2.48%

• The U.S. dollar appreciated by 1.75%

• The euro gained 2.37% against the Turkish lira

These foreign currency gains exerted downward pressure on the REER, indicating that the Turkish lira lost relative competitiveness against a trade-weighted basket of currencies, despite domestic inflation.

REER Drivers: A Complex Balancing Act

While Türkiye’s CPI contributed positively to the REER, the combined influence of the global inflation basket and nominal exchange rate movements had a stronger negative effect, driving the index downward.

The data reflect the ongoing volatility in Türkiye’s currency dynamics, where external market forces continue to shape real exchange rate competitiveness even in the face of rising internal costs.