The Turkish lira experienced a significant decrease today, following the news of the arrest of the main opposition leader, Ekrem İmamoğlu.
At one point during the day, the currency had fallen 14.5% against the dollar, although it has since recovered partially and is now around 6% lower. Since the devaluation of the lira in 2023, the central bank has been allowing the currency to depreciate gradually.
However, today’s sharp drop may complicate this strategy.
"In the very near term, this creates a major headache for the central bank. Inflation will probably accelerate this month, and policymakers will probably have to pause the monetary easing cycle when they meet in April (rather than reduce rates by another 250bp)," Capital Economics analysts wrote in a note.
The arrest of İmamoğlu also raises concerns about the broader reform agenda in Turkey. This is partly due to the potential weakening of institutions and the rule of law in the country. Moreover, it suggests that political concerns might be taking precedence over economic ones in President Erdogan’s decision-making process.
Previously, a relatively light election calendar had provided some confidence that Turkish policymakers could successfully restore macroeconomic stability. This was based on the assumption that policymakers would have the opportunity to pursue necessary, albeit painful, reforms.
However, today’s events challenge this assumption.
