Turkey’s plunging lira could herald economic turnaround

The Turkish lira sank to new historic lows on Wednesday, weakening some 7%, a likely indication of Turkey’s return to conventional market policies.

The lira, which has dropped since a currency crash in 2021, was trading at 23.12 against the greenback at 2pm GMT on Wednesday.

Critics have argued that the government was containing the currency’s devaluation in the leadup to the critical May 14 general elections by channeling hard currency to markets by using back-door means, diverging from the free market economy. The Central Bank’s forex reserves have fallen below zero for the first time since 2002, official data shows.

Turkey’s new Finance and Treasury Minister Mehmet Simsek, who is known as a champion of conventional economy politics, stressed the importance of returning to rational ground in the country’s economic policies while he accepted his portfolio from his predecessor on Sunday. 

Eyes are now on the Central Bank’s next monetary policy meeting on June 22 when the bank will decided whether to hike the interest rates in line with conventional wisdom. Heeding political pressure, the bank brought the country’s policy rates as low as 8.5% despite breakneck inflation and in contrast to the majority of the country’s peers, who hiked their rates to shield their currencies amid a grim global economic outlook. Turkish President Recep Tayyip Erdogan has adamantly argued that higher interest rates cause higher inflation.

The lira’s record fall on Wednesday likely signals a departure from previous policies aiming at containing the foreign exchange rates. Subsequently, in line with Simsek’s messages, the Central Bank is widely expected to hike interest rates in its next meeting.

Another question being closely followed by the markets is whether current Central Bank Governor Sahap Kavcioglu, who shares Erdogan’s unconventional economic ideas, will be replaced.