Wells Fargo sees sharp rise in Turkish lira in case of opposition victory

A victory by Turkey's opposition parties in their attempt to oust President Recep Tayyip Erdogan could trigger big gains for the Turkish lira by ushering in a more orthodox monetary policy, according to a Wells Fargo & Co. economist.

Brendan McKenna, an economist at the U.S. bank, said in a report that a victory by Kemal Kilicdaroglu, who has been named as the opposition’s joint candidate, would cause the lira to rally "sharply and significantly," Blooomberg reported.

“The lira could experience one of the most sizable rallies in modern history as an independent central bank gets restored and an orthodox monetary policy framework is implemented,” McKenna wrote in his report.

According to McKenna, after a victory by the opposition bloc, the lira could gain 20% by the end of the second quarter. The currency could then end the year at around 15 lira to the dollar, compared with over 18.9 currently, and continue to appreciate through 2024, he wrote.

The opposition alliance has promised a return to conventional monetary policy and an independent central bank, as well as a transition to a parliamentary system in place of the current executive presidency.

Still, a victory by Erdogan's adversary is not McKenna's baseline scenario. He reckons there is a 55% to 60% chance that Erdogan will remain in power, in which case he expects the lira to fall to as low as 19.5 per dollar by the fourth quarter.

Turkey's central bank has cut its key interest rate by 10.5 percentage points since September 2021. The last cut, to 8.5%, came last month, when the monetary authority stressed the importance of supporting economic activity in the wake of the Feb. 6 earthquakes.

Meanwhile, annual inflation stood at 55.2% in February, more than 11 times the central bank's target.

The Turkish lira has weakened 1.2% against the dollar this year, after depreciating nearly 30% in 2022.