The Turkish lira fell to a new record low against the dollar on Wednesday, a week after President Recep Tayyip Erdogan’s re-election.
The currency, heavily supported by the central bank ahead of the presidential election, fell seven percent to 23.15 pounds to the dollar by around 12:00 GMT.
Its decline reached 7.7% against the euro, after it breached the index’s threshold of 25 pounds per euro, marking its biggest one-day decline since its collapse in late 2021.
Erdogan took office on Saturday after winning a runoff election on May 28 and formed a new government in which he appointed pro-market politician Mehmet Simcek as finance minister.
Simcek, a former Merrill Lynch economist known for opposing Erdogan’s economic policies that run counter to prevailing policies, admitted that there is “no quick fix” to advancing the national currency.
He reaffirmed his commitment to “respecting the rules” in a tweet, explaining that “our immediate priority is to strengthen our team and build a program worthy of credibility.”
Shortly after taking office, Simsek said, “We have no choice but to return to logic,” signaling his departure from an unconventional policy based on lowering interest rates to combat high inflation.
“No matter who wins the election, the expectation is that the lira will move to a more competitive level,” said Timothy Ash, an emerging market economist in London.
Ash said in a note that the lira’s decline reflects the “effect” of the central bank’s push to pursue “rational policy,” meaning a weaker and more competitive currency.
“We are seeing the consequences of normalizing politics,” he added.
Central banks around the world raised interest rates in an attempt to control inflation, while Erdogan kept interest rates low in an attempt to spur growth. At one point, he described raising rates as “the root of all evil” and supported by an outside “interest-lobby”.
“Clear Clutter”
Economist Goldum Atabe said the lira’s decline was a reflection of the collapse of costly central bank interventions in the foreign exchange market.
“It has now been abandoned or greatly reduced,” he said.
I expected the lira to continue its decline until the central bank’s decision on interest rates on June 22. And he said, “We’ll see if the dollar is worth 23 or 25 pounds by that date.”
Local media reported this week that Şimşek met with Hafiza Kaya Arkan, a key US finance official who is considered the next governor of the central bank.
Many expect the former assistant CEO of First Republic Bank and general manager of Goldman Sachs to replace central bank governor Shihab Gafji Oglu.
Under Qafji Oglu, the bank cut the interest rate to 8.5 percent, while the rate was 19 percent in 2021.
Ibek Ozkardskaya, a senior analyst at Swissquote Bank, said Simsik is now considered to be working to “remove the chaos” of a year and a half to restore investor confidence.
But she cautioned, “It’s not easy.”
“In the past years, Turkey has not had competent finance ministers or smart bankers at the central bank,” he said in a note. – They will soon be dismissed.” Or reject.”
“Therefore, what investors in Turkey want to see is not how good Mehmet Simcek is in the monetary sector, but how well he will resist pressure from the presidency to keep interest rates low,” he added.
