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BusinessTurkey

Turkish lira plunges as Erdogan begins new presidential term

June 7, 2023

Analysts speculate the movement signals a turn toward a more conventional economic policy. Erdogan has for years plummeted interest rates, leading to a historic drop in the lira's value in 2021.

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Customers wait outside a currency exchange office.
The Turkish lira has plunged to a record low, for the first time since a 2021 crisisImage: Serkan Senturk/ZUMA Press Wire/picture alliance

Turkey's local currency has dived yet again on Wednesday, briefly reaching a record low of 23.19 against the US dollar at some point.

The Turkish lira plunged some 7%, recording its biggest selloff since a historic 2021 crash, which has been attributed to President Recep Tayyip Erdogan's unorthodox economic policies.

The massive drop came barely a week after Erdogan was elected for a new term in office.

As prices soar in Turkey, discontent deepens

The Turkish president has long promoted low interest rates as a route to economic growth, going as far once as describing high rates as "the mother and father of all evil" promoted by a foreign "interest lobby."

What could the lira plunge mean?

Some analysts have argued that Wednesday's dive suggests the central bank has slightly unscrewed its tight grip on the lira, after a period of stability of the currency's value to ensure the president's reelection.

Others saw it as a sign Erdogan's newly appointed Finance Minister Mehmet Simsek was preparing to introduce a long-awaited approach to hike interest rates in an effort to soften the blow.

Erdogan's program has allowed authorities to exercise much control over the foreign exchange markets, bleeding tens of billions of dollars of reserves this year alone to steady the lira.

Last month, The central bank's net forex reserves nosedived to an unprecedented low of negative $4.4 billion (approximately €4.11 billion).

No end in sight to Turkey's inflation

Could a new finance minister turn things around?

Simsek's appointment is seen as a potential turning point in Erdogan's economic policies. The former deputy prime minister, who has previously served as finance minister from 2009 until 2015, is highly regarded by foreign investors.

He was quoted as stressing the need for returning economic policy to "rational" ground, later saying on Wednesday there were "no quick fixes" for policy.

Some analysts have, however, stressed the daunting task ahead of the new minister.

"In past years, Turkey didn't lack talented finance ministers or smart central bankers. But each time someone tried to do his/her job correctly -- which in Turkey means raising the rates -- he/she got rapidly sacked," Ipek Ozkardeskaya, senior analyst at Swissquote Bank, was quoted by the French AFP news agency as saying.

Interest rates hike underway?

Some analysts have speculated that the central bank will not wait until its next convention, scheduled for June 22, to hike interest rates.

An emergency hike "is very possible (and) could stabilize markets in the short-term," the Reuters news agency quoted Ulricht Leuchtmann, head of FX research at Commerzbank, as saying.

"It smells like the beginning of a lira crisis," he added. "This is what happens when you get an exponential move - for a long time you think nothing happens, and then all for a sudden all hell breaks loose."

The re-elected president is reportedly considering a central bank governor swap. The top candidate is Hafize Gaye Erkan, a senior finance executive in the US.

Erkan met Simsek and was scheduled to meet Erdogan, Reuters reported.

rmt/jcg (AFP, Reuters)