Turkish lira hits new dollar low after re-election of after President Recep Tayyip Erdogan

The Turkish currency fell to a new low against the US dollar on Wednesday, more than a week after President Recep Tayyip Erdogan was re-elected.

The currency, which had been supported by the central bank before the presidential election, plummeted 5 per cent to 22.77 lira per dollar at roughly 0645 GMT.

After winning a historic election runoff on 28 May, Erdogan was sworn in on Saturday and announced a new government, including market-friendly lawmaker Mehmet Simsek as finance minister.

Erdogan’s unorthodox policies are well-known to the former Merrill Lynch economist.

He was finance minister from 2009 to 2015 and deputy prime minister in charge of the economy until 2018, when he stepped down in the aftermath of a series of lira collapses that year.

Soon after taking office, Simsek said, “We have no choice but to return to rational ground” — a sign of shifting away from the unorthodox policy of lowering interest rates in order to fight high inflation.

“Whoever won the election, the expectation was the lira had to go weaker, to a more competitive level,” London-based emerging markets economist Timothy Ash said in a note.

Ash said the lira’s fall showed the “impact” of Simsek pushing the central bank to have a “rational policy”, which means a weaker, competitive currency.

“We are seeing policy normalisation play out.”

Central banks worldwide have been raising rates in efforts to combat inflation.

But Erdogan has long advocated low-interest rates in a bid to stimulate growth. He once called high rates “the mother and father of all evil” promoted by a foreign “interest lobby”.

‘Clean up the mess’

Simsek met with Hafize Gaye Erkan, a senior finance executive in the United States, who is believed to next central bank governor, local media reported this week.

Erkan, a woman and former co-CEO at First Republic Bank and managing director at Goldman Sachs, is widely expected to replace central bank governor Sahap Kavcioglu.

Under Kavcioglu’s watch, the bank’s policy rate was decreased to 8.5 per cent. It had been at 19 per cent in 2021.

Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, suggested that Simsek was now supposed to “clean up the mess” of the past year and a half to restore investor confidence.

But she warned it “won’t be a piece of cake”.

“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,” she said in a note.

“Therefore, what investors want to see in Turkey is not how talented Mehmet Simsek is in finance, but how resistant he will be to the low-rate pressure from the presidential office.”

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