Currency undergoes biggest fall since late 2021 after finance minister’s pledge to restore ‘rational’ policies

Turkey eased its long-running battle to defend the lira, sending the currency into its biggest fall in more than a year as President Recep Tayyip Erdoğan’s new economic team implements more “rational” policies.

The currency on Wednesday dropped 6.9 per cent to a record low of 23.17 against the US dollar, leaving it down almost 10 per cent since this weekend’s appointment of Mehmet Şimşek as finance minister. The lira has not ended a day with such a big fall since December 2021, Refinitiv data shows.

In comments posted on Twitter on Wednesday after being sworn in, Şimşek said his “immediate priority” was “to strengthen our team and design a credible programme”, although he warned that “there are no short-cuts or quick fixes”.

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

“This exchange rate . . . was heavily suppressed by alternative financial [measures] before the election,” said Enver Erkan, chief economist at brokerage Dinamik Yatırım Menkul Değerler. “The new period will bring a more liberal approach in this regard and will create a situation that will enable the lira to get closer to its real value.”

The fall this week highlights how investors are increasingly expecting a shift towards more orthodox measures in the aftermath of Erdoğan’s election victory last month. Some analysts also expect a new central bank chief will be appointed with a more orthodox economic approach.

The pace of the lira’s depreciation has been rapid: Goldman Sachs said at the weekend that it expected the lira to fall to 23 against the dollar in the next three months, a forecast that came to fruition in a matter of days.

One big bank in currency trading told clients on Wednesday that Turkish state banks appeared not to be intervening in the market, according to a person familiar with the matter. An executive at a western bank noted the same trend. State bank lira purchases have been an important tool in propping up the currency in recent years.

An executive at a Turkish bank, who asked not to be named, described Wednesday’s move as an “intentional devaluation” as opposed to a full loosening of controls. Currency analysts broadly say the lira is overvalued in relation to Turkey’s economic position, even after falling more than 60 per cent against the dollar over the past two years.

Erdoğan had insisted on huge interest rate cuts, with the main policy rate falling from 19 per cent in March 2021 to 8.5 per cent on Wednesday despite intense inflation. This has knocked “real”, or inflation-adjusted, rates deep 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 the probability of a larger one-off adjustment having increased,” Goldman said in a note to clients, predicting a fall to 28 against the dollar in the next year.

The central bank has burnt through about $24bn in foreign currency reserves this year alone, in part in an attempt to boost the lira. The reserves have also been used, economists say, to finance Turkey’s big current account deficit, which itself has been made worse by a lira that many exporters have said is too strong to be competitive.

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

While the lira has fallen sharply, other indicators have pointed to relief among investors about the proposed policy shift. Turkey’s dollar bonds have rallied in price, while the cost to protect against a default has eased markedly. The country’s stock market has also risen, with the benchmark Bist 100 index rallying 3.2 per cent on Wednesday to bring its gains for the week to almost 9 per cent.