Turkish lira plunged 7%, amid the largest selling since the 2021 crisis

The Turkish lira plunged 7 percent on Wednesday to a new record high amid the biggest sell-off in the currency since its historic collapse in 2021, as the new Turkish government appeared to ease stabilization measures after hinting at a shift to more traditional policies.

The lira has been under pressure since President Recep Tayyip Erdogan was re-elected for a new term on May 28. It fell to 22.98 per dollar by 0735 hours.

The lira touched a record low of 23.16 per dollar earlier, bringing its losses since the beginning of the year so far to nearly 19 percent.

Erdogan announced the formation of the new government earlier this week and appointed Mehmet Simsek, who is highly regarded among foreign investors, as finance minister. After his appointment, Simsek said Turkey’s economic policy needed to return to a “rationale”.

The markets are also awaiting the appointment of a new governor of the Turkish Central Bank to replace Shihab Qawuji Oglu, who led interest rate cuts under Erdogan’s unconventional policies.

The authorities intervened directly in the foreign exchange markets, as they resorted to tens of billions of dollars in reserves to maintain the stability of the lira for most of this year.

Some analysts expect the lira to fall to a range between 25 and 28 against the dollar.

Under pressure from Erdogan, who describes himself as the “enemy” of interest rates, the central bank cut the interest rate to 8.5 percent from 19 percent in 2021 to boost growth and investment. However, this sparked a record crisis for the lira in December 2021 and pushed inflation to the highest level in 24 years, exceeding 85 percent last year.

The return of Şimşek, who was finance minister and deputy prime minister from 2009 to 2018, heralds a move away from unorthodox interest rate cuts, which have been implemented despite soaring inflation and caused the lira to lose more than 80 percent of its value in five years. .

“We think the fair value of the lira is probably 15 percent lower or so, but containing the depreciation without significant external support will be a very difficult task,” he added.