Turkish lira falls as Erdogan backs more conservative economic team

Turkey’s lira fell the most since late 2021 on Wednesday as President Recep Tayyip Erdoğan’s new economic team began loosening the shackles that had slowed its decline in recent months.

The currency fell 6 percent to a new record low of 23 in London trading on Wednesday against the dollar, down almost 9 percent since the appointment of Mehmet Simcek as finance minister over the weekend. The lira hasn’t ended a day with such a large decline since December 2021, Refinitiv data show.

Simsek, a former deputy prime minister who is well regarded by foreign investors, has promised to restore “rational” economic policies in Turkey after years of rate cuts and unorthodox measures to shore up the currency.

“This exchange rate . And will create a situation that will enable the lira to recover closer to its real value.”

The decline this week highlights how investors are anticipating a shift towards more conservative measures following Erdogan’s election victory last month. Erdogan is expected by some analysts to name a new central bank chief with a more conservative economic outlook.

The pace of lira depreciation has been accelerating: Goldman Sachs said over the weekend that it expected the lira to fall to 23 against the dollar over the next three months, a forecast that actually came to fruition within days.

A large bank in currency trading told customers on Wednesday that the Turkish state bank was not intervening in the market, according to a person familiar with the matter. State Bank lira purchases have been seen in recent years as an important tool in boosting the currency.

Currency analysts broadly say the lira is overvalued relative to Turkey’s economic situation, even after falling more than 60 percent against the dollar over the past two years. Erdogan has pushed for a steep rate cut, with the main policy rate falling from 19 percent in March 2021 to 8.5 percent today, despite sharp inflation. This has pushed “real”, or inflation-adjusted, interest rates into negative territory.

“With such pressure on the lira, we think it is a question of when rather than if the currency weakens significantly with a large one-time adjustment increasing the likelihood,” Goldman said in a note to clients. 28 against the dollar the following year.

In an effort to prop up the lira, the central bank has drawn some $24 billion into foreign exchange reserves this year alone. Reserves have also been used, economists say, to finance Turkey’s large current account deficit, which has itself been made worse by a lira that many exporters have said is too competitive to be used. Too strong for

Murat Gulkan, chief executive of OMG Capital Advisors in Istanbul, said that while “things are starting to make sense” with the currency, inflation was “running high”.

Simsek, a former senior bond strategist at Merrill Lynch in London, pledged on Sunday that Turkey would switch to a policy of “transparency, stability, predictability and compliance with international norms”, aiming to bring inflation down from about 40 percent currently. for one point.

While the lira declined sharply, other indicators pointed to relief among investors about the proposed policy change. Turkey’s dollar bonds have risen in price, while the cost of protecting against default has decreased markedly.

Turkey’s lira fell the most since late 2021 on Wednesday as President Recep Tayyip Erdoğan’s new economic team began loosening the shackles that had slowed its decline in recent months.

The currency fell 6 percent to a new record low of 23 in London trading on Wednesday against the dollar, down almost 9 percent since the appointment of Mehmet Simcek as finance minister over the weekend. The lira hasn’t ended a day with such a large decline since December 2021, Refinitiv data show.

Simsek, a former deputy prime minister who is well regarded by foreign investors, has promised to restore “rational” economic policies in Turkey after years of rate cuts and unorthodox measures to shore up the currency.

“This exchange rate . And will create a situation that will enable the lira to recover closer to its real value.”

The decline this week highlights how investors are anticipating a shift towards more conservative measures following Erdogan’s election victory last month. Erdogan is expected by some analysts to name a new central bank chief with a more conservative economic outlook.

The pace of lira depreciation has been accelerating: Goldman Sachs said over the weekend that it expected the lira to fall to 23 against the dollar over the next three months, a forecast that actually came to fruition within days.

A large bank in currency trading told customers on Wednesday that the Turkish state bank was not intervening in the market, according to a person familiar with the matter. State Bank lira purchases have been seen in recent years as an important tool in boosting the currency.

Currency analysts broadly say the lira is overvalued relative to Turkey’s economic situation, even after falling more than 60 percent against the dollar over the past two years. Erdogan has pushed for a steep rate cut, with the main policy rate falling from 19 percent in March 2021 to 8.5 percent today, despite sharp inflation. This has pushed “real”, or inflation-adjusted, interest rates into negative territory.

“With such pressure on the lira, we think it is a question of when rather than if the currency weakens significantly with a large one-time adjustment increasing the likelihood,” Goldman said in a note to clients. 28 against the dollar the following year.

In an effort to prop up the lira, the central bank has drawn some $24 billion into foreign exchange reserves this year alone. Reserves have also been used, economists say, to finance Turkey’s large current account deficit, which has itself been made worse by a lira that many exporters have said is too competitive to be used. Too strong for

Murat Gulkan, chief executive of OMG Capital Advisors in Istanbul, said that while “things are starting to make sense” with the currency, inflation was “running high”.

Simsek, a former senior bond strategist at Merrill Lynch in London, pledged on Sunday that Turkey would switch to a policy of “transparency, stability, predictability and compliance with international norms”, aiming to bring inflation down from about 40 percent currently. for one point.

While the lira declined sharply, other indicators pointed to relief among investors about the proposed policy change. Turkey’s dollar bonds have risen in price, while the cost of protecting against default has decreased markedly.