Turkish Lira sinks to fresh record lows of 26 a dollar despite rate hike

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Vrasidas Neofytou
Head of Investment Research

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Turkish Lira sinks to fresh record lows of 26 a dollar despite rate hike

The Turkish lira continued its downward trend on Thursday morning, falling below the 26 mark a dollar and to nearly 28.50 per Euro for the first time, extending the sharp selloff largely after the re-election of President Tayyip Erdogan during the second round of presidential elections in Turkey on May 28.

USD/TRY pair, Daily chart

Since the elections in late May, the Lira has lost nearly 30% of its value against the US dollar -after trading at around the 20 mark (as per the chart above) on the last trading day before the elections- and 34% against Euro -trading around 21.30 on Friday, May 26, continuing the gradual depreciation and posting new all-time lows against the major peers.

Lira has been sinking to new record lows against major currencies despite the central bank -under new Governor Hafize Gaye Erkan- raising rates by 650 basis points to 15% last Thursday, marking the country’s first hike since March 2021, a substantial rate hike even though it fell short of market expectations of a hike over 20%.

Investors have not yet been convinced by President Erdogan’s decision to back down on his years of unorthodox monetary and economic policy- widely called “Erdoganomic,”, at a time Governor Hafize Gaye Erkan hinted at more rate hikes until the inflation outlook in the country improves.

Erdogan, which is adversarial to the higher rates, had ordered prior central bankers to slash interest rates to 8.5% from 19% last year despite the rally of inflation to as high as 80%, before retreating to the current levels of 40%.

Markets have not even cheered the appointment of two monetary-orthodox oriented officials, the first in the role of Central Banker- Hafize Gaye Erkan- a former banker in the United States, and the second was the return of the former finance minister and former Merrill Lynch executive Mehmet Simsek as the country's new finance minister.

From his stance, Simsek said that a predictable fiscal policy and free exchange rate regime will “ensure that the Turkish lira regains stability and becomes a reliable currency.”

From his stance, Simsek said that a predictable fiscal policy and free exchange rate regime will “ensure that the Turkish lira regains stability and becomes a reliable currency.” https://www.cnbc.com/2023/06/23/turkish-lira-sinks-to-new-lows-following-central-banks-rate-hike.html

However, investors have been moving away from Lira as long as President Erdogan has the unilateral power and ability to reverse these new monetary policy initiatives at any time he chooses in the future, combined with his demonstrated lack of patience with orthodox and conventional monetary and economic policy.

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