Turkish lira continues freefall

After experiencing a sharp increase of approximately 7% on Wednesday, the USD/TRY exchange rate continued to rise on Thursday with the USD reaching a level of 23.5 against the TL at 10:00 am.

Bloomberg attributed this rise in the exchange rate to the public banks' decision to reduce intervention in the market while Reuters reported that this led to a halt in the decline of the Central Bank's reserves.

Bankers interviewed by Reuters described these developments as a return to free market conditions.

Prior to the elections, it was reported that the Central Bank intervened in the market through public banks to suppress the USD/TRY exchange rate.

Many foreign institutions predicted that the exchange rate would rise once this intervention ceased after the elections.

Commerzbank, which revised its USD/TRY exchange rate forecast after the elections, increased its year-end exchange rate expectation from 20 to 25.

Goldman Sachs analysts, in their report dated June 3, raised their three-month USD/TRY forecast from 19 to 23, their six-month forecast from 21 to 25, and their twelve-month forecast from 22 to 28.

Analysts had noted that international net foreign exchange reserves had entered negative territory.

Since the beginning of the year, the Turkish lira has depreciated by approximately 18 percent against the dollar.

Economist Mahfi Egilmez referred to the policies implemented before the elections in his blog post on USD hike on Wednesday. He criticized the pursuit of a low-interest-rate policy despite high inflation.

"I believe that this economic policy, which I consider wrong, was deliberately implemented to win the elections," he said, in agreement with other commentators. "The economy has been entirely driven by the elections for almost two years, and no attention has been paid to the severe damage inflicted on the economy."

Hakan Kara, former chief economist of the Central Bank, stated on Twitter, "It seems that Turkish assets are being cheapened in terms of the dollar, and after a certain threshold, capital inflows are targeted through interest rate hikes. In practice, this is not easy to accomplish, but it may be possible while foreign exchange transaction restrictions continue."

Piotr Matys, a senior currency analyst at InTouch Capital Markets in the UK, stated that today's sharp depreciation of the Turkish lira indicates that the exchange rate will be allowed to move more freely.

Matys, speaking to Reuters, stated that the exchange rate has adapted to high inflation and a low-interest-rate policy.

Ulrich Leuchtmann, head of Commerzbank's currency research desk, also described the current situation as the "beginning of a Turkish lira crisis" in his statement to Reuters.

Leuchtmann stated, "If we do not see any lasting changes, Turkey may remain caught in a devaluation and rising inflation spiral, and it will be difficult to determine where it will end," emphasizing the difficulty of calculating the true value of the Turkish lira.

The policies to be pursued by Mehmet Şimşek, who has been appointed as the Minister of Treasury and Finance, will be crucial in determining the future course of the exchange rate and inflation.

News of the possible appointment of economist Hafize Gaye Erkan as the head of the Central Bank in the United States is also being interpreted as a sign of a potential increase in interest rates.

However, President Erdogan had stated in an interview with CNN before the elections that the low-interest-rate policy would not be abandoned.