A victory for Turkey’s opposition parties in their bid to unseat President Recep Tayyip Erdogan could trigger big gains for the lira by ushering in more orthodox monetary policy, according to a Wells Fargo & Co. economist.
(Bloomberg) — A victory for Turkey’s opposition parties in their bid to unseat President Recep Tayyip Erdogan could trigger big gains for the lira by ushering in more orthodox monetary policy, according to a Wells Fargo & Co. economist.
A bloc of six parties that oppose Erdogan earlier this week named Kemal Kilicdaroglu, a veteran politician and economist, as their candidate to take him on in elections slated for May.
An against-the-odds win for Kilicdaroglu would cause the lira to rally “sharply and significantly” as investors bet Turkey’s central bank would revert to a more orthodox rate-setting regime, Brendan McKenna, an economist at the US bank, said in a report.
“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 the aftermath of an opposition bloc victory, the lira could strengthen by 20% by the end of the second quarter, according to McKenna. The currency could then end the year at around 15 lira to the dollar from more than 18.9 now and also keep strengthening into 2024, he wrote.
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The opposition alliance has pledged a return to conventional monetary policy and an independent central bank, as well as a shift to a parliamentary system from the current executive presidency.
Unlikely Scenario
Even so, a victory for Erdogan’s adversary is not McKenna’s base-case scenario. He ascribes a 55%-60% probability to Erdogan holding on to power, and sees the lira weakening to as low as 19.5 per dollar by the fourth quarter if he does so.
Turkey’s central bank has slashed its benchmark rate by 10.5 percentage points since September 2021. Its most recent cut to 8.5% came last month, as the monetary authority emphasized the importance of supporting activity in the aftermath of the Feb. 6 earthquakes.
Meanwhile, annual inflation stood at 55.2% as of February, more than 11 times the central bank’s target.
The Turkish lira has weakened 1.2% against the dollar so far this year, following a depreciation of nearly 30% in 2022.
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