Business

Turkish lira plunges as Erdogan begins new presidential term

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.

Two people standing in front of a currency display board (photo: DW)
Two people standing in front of a currency display board (photo: DW) DW

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.

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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.

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

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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."

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What could the lira plunge mean?

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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.

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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.

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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.

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

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Could a new finance minister turn things around?

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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.

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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.

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

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"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.

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Interest rates hike underway?

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

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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.

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"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."

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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.

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

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