Turkish currency collapses by 7%, reaching an unprecedented level

The currency has been under increasing pressure since the re-election of President Tayyip Erdogan on May 28. It reached an unprecedented level of 23.17 against the dollar at 10:23 GMT on Wednesday, bringing its losses this year to over 19%.

Change in monetary policy

Authorities have been heavily present in the foreign exchange markets this year, using tens of billions of dollars in reserves to maintain currency stability. The central bank’s net foreign currency reserves reached an unprecedented level of -$4.4 billion last month, after demand for foreign currency increased during the electoral process.

Four traders indicated that the central bank’s foreign currency and gold reserves stopped decreasing last week and could enter an upward trend, with signs of a change in currency policy.

“There are many regulations and changes to be made, but the direction we are heading in is becoming clearer every day. We are moving towards determining the value of the currency by market conditions,” said one trader.

Read also: Fear of earthquakes prompts hundreds of thousands of Istanbul residents to seek safer homes

New government and market expectations

Erdogan introduced his new government last weekend and appointed Mehmet Simsek, a former deputy prime minister well-regarded by foreign investors, as finance minister. Simsek later stated that economic policy needed to return to “rational” foundations.

Markets are also awaiting the appointment of a new central bank governor to replace Sahap Kavcioglu, who led interest rate cuts under Erdogan’s heterodox policies.

“We are witnessing a normalization of policy,” said Tim Ash of BlueBay Asset Management. “I think we are seeing the impact of Simsek pushing (the Turkish central bank) towards rational policy.”

Return to monetary orthodoxy

Under pressure from Erdogan, a self-proclaimed “enemy” of interest rates, the central bank reduced its benchmark rate to 8.5% from 19% in 2021 to stimulate growth and investment. This triggered a historic currency crisis in December 2021 and pushed inflation to a 24-year high above 85% last year.

Simsek’s return, who served as finance minister and deputy prime minister from 2009 to 2018, signaled a departure from heterodox interest rate cuts despite high inflation that caused an erosion of over 80% of the currency’s value in five years.

Erdogan is considering appointing Hafize Gaye Erkan, a senior financial official in the United States, as central bank governor, Reuters reported on Monday. Erkan met with Simsek in Ankara on Monday.

Erkan would be the country’s fifth central bank governor in four years, after Erdogan dismissed previous governors amid frequent policy changes.

Turkish authorities now hope that foreign investors will return after years of exodus, but market observers have warned that Erdogan has turned to conventional policies in the past only to change his mind shortly after.