The value of the Turkish lira fell to a historic low two days before the decisive second round of the neighboring country’s presidential election.
As investors fear the possible re-election of Recep Tayyip Erdogan after his unlikely victory in the May 15 primary, pressure is mounting on Turkey and its financial assets. Therefore, the lira will inevitably fall to the psychological threshold of 20 per dollar, which is a historical minimum. Against the euro, meanwhile, the lira is retreating to 21.5. That is, very close to the historical low of 21.6 per euro.
The main concern for investors is Turkey’s unorthodox monetary policy, which has kept interest rates at excessively low levels without caring about rampant inflation, which at one point hit 80%.
According to the prevailing economic theory, an increase in interest rates is necessary to counter the appreciation, as in the rest of the world. However, Erdogan, not wanting to stifle growth, chose to… ignore inflation and its dramatic consequences by keeping real interest rates negative. It is no coincidence that in 2023 the lira will fall by at least 20%, continuing the large losses of recent years.
For his part, opposition leader Kemal Kilicdaroglu promised to restore Turkey’s investment confidence by strengthening central bank independence and returning the country to an orthodox monetary policy.
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