Turkey’s Central Bank Takes Major Action Amid Political Crisis
In a swift response to a brewing political crisis, Turkey’s central bank embarked on an unprecedented intervention, deploying nearly $12 billion to support the faltering lira. The sudden depreciation of the currency followed President Recep Tayyip Erdoğan’s controversial decision to detain political rival Ekrem İmamoğlu, the mayor of Istanbul and a prominent opposition leader.
Record Intervention to Support the Lira
On Wednesday, the Turkish central bank expended approximately $11.5 billion to stabilize the lira, a move that surpasses any previous intervention recorded. This action was prompted by a staggering 11 percent drop in the lira against the US dollar, marking its lowest point ever. According to a source familiar with the situation and analyses from Bürümcekçi Research and Consultancy, the intervention aimed to counteract a rapid exodus of investments triggered by political instability.
Market Reactions and Investor Confidence
A Turkish banker remarked that market officials seemed to have “lost control” of the situation, suggesting that the intervention left lasting damage on investor sentiment. JPMorgan Chase noted significant liquidity issues affecting the lira amid considerable capital flight, further illustrating the market’s reaction to the unfolding events.
The central bank has refrained from public commentary regarding these interventions. Analysts speculate that subsequent interventions may have occurred on Thursday and Friday following the initial move.
Emergency Measures and Market Stability Efforts
In addition to direct market interventions, policymakers convened for an emergency central bank meeting on Thursday, during which they raised the overnight interest rate to incentivize savers to retain their funds in lira accounts rather than switching to the US dollar.
Despite these measures, while the lira’s decline moderated, the Istanbul BIST 100 share index plummeted nearly 8 percent on Friday, marking its steepest weekly decline since 2008. The ongoing financial turbulence has raised serious concerns among investors regarding the future stability of Turkey’s economy.
Political Backdrop and Future Implications
Ekrem İmamoğlu, a key figure in the opposition Republican People’s Party (CHP), had been viewed as a formidable challenger to Erdoğan, especially considering anticipations of early presidential elections. His arrest has sparked widespread unrest, with protests planned by the CHP over the weekend, which Erdoğan labeled as “street terrorism.”
This political upheaval poses substantial setbacks to Erdoğan’s recent economic reform initiatives, which began post-re-election in 2023, under the guidance of former Merrill Lynch banker Mehmet Şimşek. These reforms have attempted to address Turkey’s entrenched inflation crisis and attract investors fleeing instability.
Economic Reforms and Market Outlook
Şimşek’s reforms featured significant interest rate hikes, countering Erdoğan’s past preference for low rates amid soaring inflation. Although inflation has been reduced from over 85 percent in late 2022 to 39 percent currently, the recent events threaten to reverse these gains.
Before the latest interventions, Turkey’s gross foreign currency reserves had nearly reached $100 billion, recovering from about $57 billion during mid-2023. However, long-term investors remain wary, concerned about the potential for Erdoğan to revert to his previously unorthodox economic policies.
Despite hesitations, hedge funds and other investors, drawn by interest rates exceeding 40 percent, have engaged in massive “carry trades,” leveraging low-yield currencies to capitalize on higher returns in Turkey, according to JPMorgan estimates.
As Turkey navigates this turbulent period, the interplay of political developments and economic policy will be critical in shaping investor confidence and currency stability moving forward.
