Turkey eases forex controls, rate hikes next as Simsek takes charge

ISTANBUL — The Turkish lira dropped to an all-time low this week in a sign that Ankara is loosening control of the foreign exchange market after the country’s new economy chief Mehmet Simsek vowed a return to “rational ground” in managing the economy.

Raising interest rates is expected to be the next crucial step after President Recep Tayyip Erdogan replaced the Central Bank governor on Friday following his appointment of Simsek as treasury and finance minister last week. The moves are seen as a signal that Erdogan will step back from his unorthodox policies, widely blamed for Turkey’s foreign currency crunch and cost-of-living crisis, after winning reelection on May 28. Simsek, who had served as finance minister and deputy prime minister under Erdogan from 2009 to 2018, is highly regarded among international investors, whom Turkey badly needs to lure back to ease its economic woes. 

Taking over the Central Bank is Hafize Gaye Erkan, the first woman to head the institution after serving as a senior executive at First Republic Bank and Goldman Sachs in the United States. Outgoing Sahap Kavcioglu, an Erdogan loyalist who heeded the president’s controversial rate-cutting drive, was appointed head of Turkey's banking watchdog, prompting some observers to question how much autonomy Simsek will have in reshaping economic bodies and policies.

The necessary fixes, meanwhile, portend some side effects. For one, Turkey’s economy is heavily reliant on imported inputs, chief among them energy, and higher foreign exchange prices would mean rising costs and thus a surge in consumer inflation. And with the prospect of belt-tightening policies causing demand to plunge, the economy would begin to contract. This danger raises the specter of stagflation, economic stagnation accompanied by high inflation.