(News Bulletin 247) – The Turkish currency sank a new historic low against the dollar on Wednesday, ten days after the re-election of Recep Tayyip Erdogan as head of the country. The Turkish currency suffers from a heterodox monetary policy in the face of galloping inflation.

The Turkish lira, which fell more than 6% on Wednesday, hit a new all-time low against the dollar, ten days after the re-election of President Recep Tayyip Erdogan.

The Turkish currency, massively supported before the presidential and legislative elections in May by the Turkish Central Bank, was trading shortly after 07:30 GMT at nearly one dollar for 23 Turkish liras, at -6.3%.

The Turkish lira also lost a lot of ground against the euro (-6.85%). It traded above 24.80 pounds for one euro, against less than 21.50 pounds for one euro before the second round of the presidential election on May 28.

Turkey’s central bank spent nearly $30 billion to prop up the national currency between Jan. 1 and the presidential election, pushing its foreign exchange reserves into negative territory for the first time since 2002.

Turkish President Recep Tayyip Erdogan, who has conducted a heterodox monetary policy in recent years, appointed a new economy minister on Saturday, Mehmet Simsek, whose mission will be to stem inflation (39.6% over one year in May) and put the Turkish economy back on track.

When he took office on Sunday, Mehmet Simsek, a supporter of an orthodox economic policy, warned that it would be necessary to return to “rational measures” to restore the economy.

An “inevitable fall”

“I think we see the impact of Simsek pushing the Turkish Central Bank towards rational policy – which means a weaker and more competitive currency,” Timothy Ash, an emerging markets analyst at BlueBay, said on Wednesday. “we are witnessing a normalization” of Turkish monetary policy.

For Ipek Ozkardeskaya, an analyst at Swissquote Bank, the Turkish lira is coming out of a “coma” and “will go from one record to another again”.

“Nobody knows what the (Turkish) government really wants to do, but we know that there is, after the elections, an effort to get out of an absurd monetary policy and return to more orthodox choices”, affirms- She.

“It was inevitable,” economist Güldem Atabay told AFP. For her, this fall in the pound should last until the decision of the central bank on interest rates on June 22. “How much will interest rates rise? If it’s 25 basis points (…), it won’t change anything. Will they go from 8.5% to 20%? We’ll see,” adds Güldem Atabay .

Analysts believe that a sharp rise in the key rate, currently stable at 8.5% since the end of February, could help stem the slide in the Turkish lira.

President Erdogan has forced Turkey’s central bank to steadily lower interest rates, contributing to soaring inflation. Contrary to classic economic theories, the Turkish head of state asserts that high interest rates promote inflation.

(With AFP)