The Turkish lira reached a new all-time low on Monday as investors awaited signals on policy decisions following the appointment of a new central bank governor who is anticipated to raise interest rates.
The lira weakened by 1.3% against the dollar, reaching 23.65, after hitting an overnight record low of 23.77. It has depreciated over 21% since the beginning of this year. President Tayyip Erdogan recently named Hafize Gaye Erkan, a former finance executive based in the United States, as the head of the central bank. Erkan is widely expected to reverse the previous trend of rate cuts and adopt a tighter monetary policy.
JPMorgan stated on Monday that it predicts the central bank to raise interest rates to 25 percent during Erkan’s first meeting in charge, scheduled for June. The bank also suggested that forward guidance may accompany the rate hike, indicating the possibility of further increases if necessary.
Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman in New York, commented, “The next policy meeting is on June 22, and the central bank would need to raise rates aggressively in order to restore market confidence.”
Authorities have traditionally exerted significant control over the foreign exchange market, and bankers expect this interventionist approach to continue during the transition towards normalization.
“It appears that the state will continue to play an active role in the foreign exchange market until interest rates reach appropriate levels,” noted a forex desk trader at a bank.
Erkan is the fifth central bank governor in four years, underscoring the challenge she faces in implementing a sustainable policy reversal after years of eroding the bank’s independence under Erdogan’s administration.
Erdogan, who has openly opposed higher interest rates, has consistently pushed for stimulus measures and has swiftly replaced central bank governors in the past. However, he has also reversed his stance on policy decisions before.
Erkan replaces Sahap Kavcioglu, who led Erdogan’s campaign of rate cuts that triggered a significant currency devaluation in 2021 and resulted in inflation reaching a 24-year high of over 85 percent last year.
Erkan’s appointment comes less than a week after Erdogan appointed Mehmet Simsek, a respected former finance minister known for his orthodox economic approach, as the minister in charge of the economy.
Market participants are closely monitoring for any further changes in personnel within the central bank’s monetary policy committee, regulatory bodies, state banks, and the Turkey Wealth Fund.
Simsek is expected to meet with the heads of Turkish banks by the end of this week.
In other news, Turkey’s annual inflation rate has dropped below 40 percent for the first time in 16 months, and the country’s economy is expected to return to a more stable state, according to new finance minister Simsek.
