Home » Turkish Lira Crashes as New Government Sets Sights on ‘Rational’ Policies

Turkish Lira Crashes as New Government Sets Sights on ‘Rational’ Policies

Turkey’s lira has plunged 7% to a record low in its biggest daily selloff since a historic 2021 crash, as the newly elected government appeared to loosen currency stabilizing measures in its switch to more mainstream policies.

The lira has come under pressure since President Tayyip Erdogan was re-elected on May 28. It touched a record low of 23.16 against the dollar on Wednesday, bringing its losses this year to more than 19%.

Erdogan announced his new cabinet at the weekend and named Mehmet Simsek, a former deputy prime minister who is well-regarded by foreign investors, as finance minister. Simsek later said economic policy needed to return to “rational” ground.

Markets are also waiting for the appointment of a new central bank governor to replace Sahap Kavcioglu, who spearheaded interest rate cuts under Erdogan’s unorthodox policies.

“We are seeing policy normalization play out,” said Tim Ash at BlueBay Asset Management. “I think we are seeing the impact of Simsek pushing [the Turkish central bank] for rational policy.”

For much of this year, authorities have taken a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves to hold the lira steady.

Bankers say the lira’s continued gradual depreciation will lead to improved market conditions and halt a decline in central bank reserves.

“The lira is getting closer every day to a level that will not need to be defended with reserves. I expect losses to continue for a while,” a foreign exchange trader said.

Return to orthodoxy

Under pressure from Erdogan, a self-described “enemy” of interest rates, the central bank slashed its benchmark rate to 8.5% from 19% in 2021 to boost economic growth and investment. But it sparked a record lira crisis in 2021 and sent inflation to a 24-year high above 85% last year.

The return of Simsek signaled a move away from the unorthodox rate cuts despite high inflation.

Erdogan is considering appointing Hafize Gaye Erkan, a senior finance executive in the United States, as central bank governor, Reuters reported Monday. Erkan met with Simsek in Ankara that day.

Erkan would be the country’s fifth central bank chief in four years, after Erdogan fired previous governors as part of frequent policy shifts.

Turkish authorities are now hoping foreign investors will return after a years-long exodus, but market watchers cautioned that Erdogan turned to conventional policies in the past only to change his mind shortly after.

“Even without political interference, the process of getting Turkey onto a sustainable path is going to be turbulent, and likely involves substantial devaluation,” said Paul McNamara, director of emerging market debt at asset manager GAM.

“Orthodoxy would involve allowing the lira to find a sustainable level without intervention and abandoning the de facto capital controls currently in place.”

Source : CNN