The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

The re-elected Turkish president, Recep Tayyip Erdoğan, wanted to calm the markets and settle the Turkish currency crisis with the new finance minister, Mehmet Şimşek. But the plan did not work, and the lira hit a new record low on Friday last week.

The Turkish lira fell to new lows against the US dollar and the Euro late last week. The dollar rose to a record high of 23.4 lira, and the euro to 25.5 lira. On Wednesday, the lira had already recorded its sharpest daily drop against the dollar in a year.

The Turkish lira, which has already lost significant value due to Erdoğan's economic and monetary policy, has fallen by around 20 percent against the dollar since the beginning of the year. It also fell by 44 percent and 30 percent in 2021 and 2022, respectively. The weak national currency makes imports, on which the resource-poor country depends, noticeably more expensive.

The Turkish lira has been under heavy pressure since president Erdoğan was re-elected. Before the run-off election for the presidency at the end of May, which Erdoğan won as the incumbent, the exchange rates were still around 20 lira per dollar and 21.50 lira per euro. The appointment of Mehmet Şimşek as finance minister did not support the lira either.

Şimşek, who was finance minister in 2009 and 2018, announced his country's return to "rational fundamentals" in economic and financial policy.

Then, on Friday, the pPresident appointed Hafize Gaye Erkan as head of the Turkish central bank. The financial manager previously worked for the now-collapsed First Republic Bank for eight years. It is the fifth change in just four years at the top of Turkey’s central bank.

The financial markets apparently do not believe that Erdoğan is making a lasting change in economic policy. The appointment was necessary but does not indicate a sufficient condition for an actual permanent u-turn in monetary policy. In the best-case scenario, currency watchdogs could push through short-term interest rate hikes, but not a lasting turn towards a stability-oriented monetary policy.

In the past, Erdoğan haa repeatedly pressured the central bank to keep interest rates low despite very high inflation. This has weighed heavily on the lira. Most recently, inflation was still around 40 percent despite a decline. Inflation peaked at more than 85 percent last year. And there are fewer investments in Turkey due to ongoing conflicts with western Europe.

The central bank's support measures are considered to have little prospect of success, since the funds are permanently lacking. According to economists, only a decisive turnaround with sharp interest rate hikes and a sustainable change in policy can stabilise the lira in the long-term.