Turkish lira collapses to new all-time low

The Turkish currency reached a historic low against the dollar – on June 7, for the first time, it exceeded 23 lira. At 13:30 Moscow time. one dollar was worth 23.17 lira, up 7.53% from the close on 6 June. This is also the rapid strong collapse of the Turkish currency from 2021.

Since the May 28 elections, which resulted in Recep Tayyip Erdogan again taking over as president of Turkey, the lira has lost 13%. Over the past year, it has fallen in price against the dollar by more than 33%.

The main reason for the weakening of the currency, Bloomberg calls the refusal of banks from foreign exchange interventions, which may be a sign of the preparation of the new economic authorities for a reversal of monetary policy. Hope for a return to more classical economic policies emerged after Erdogan appointed former Merrill Lynch strategist Mehmet Simsek as finance minister and head of the treasury in the new administration.

“Transparency, predictability, consistency and compatibility with international norms will be the main principles,” Shimshek said in his first speech after the appointment.

The experiment with the Turkish monetary policy of the last decade, based on the fact that high interest rates cause inflation, and therefore they need to be reduced, has failed, Vedomosti wrote earlier. It was Erdogan who advocated lowering the key rate as a measure to curb inflation: producers with expensive money are forced to shift their costs to buyers and this leads to higher prices. Despite double-digit inflation rates, the Central Bank of the Republic of Turkey (CBRT) cut the rate from 19% to 14% in 2021, 9% in 2022, and 8.5% in 2023. The reduction of the key rate during the period of rising prices led to a sharp depreciation of the lira and the unwinding of the inflationary spiral (last autumn, inflation exceeded 85%).

The devaluation of the lira continues against the backdrop of all the same inputs, notes an expert on the stock market “BCS The world of investments” Mikhail Zeltser: Erdogan was re-elected, which means that the Central Bank rate remains soft in the face of record double-digit inflation. Nevertheless, inflation is already slowing down, and energy costs are reduced due to the fall in oil and gas prices to two-year lows, the expert notes.

The large-scale wave of lira devaluation is most likely close to completion, Zeltsev believes, and after this impulse is exhausted, the correction may also be strong. True, the analyst adds, one cannot dream of levels below 19.

Despite the hope of returning to the traditional model of monetary policy, global investment banks are negative about the prospects for the lira exchange rate. Goldman Sachs revised its annual forecast upwards: they expect 28 lira/$ against 22 lira/$ earlier. The lira against the dollar will collapse by almost 40% after Erdogan’s victory, Morgan Stanley experts believe. Wells Fargo predicted that the Turkish currency would fall to 23 lira/$ by the end of the second quarter, and to 25 lira/$ in the next. The American financial conglomerate does not expect Erdogan to change his approach to monetary policy.