Turkey’s Political Tensions Shake Markets And Currency

The Turkish lira has plummeted to record lows, trading near 38 against the US dollar, reflecting a significant depreciation from 32.04 a year ago. This sharp decline could exacerbate Turkey’s already challenging inflation situation, with rates hovering around 39% as of February 2025. For ordinary citizens, this translates to rapidly eroding purchasing power and increasing costs for imported goods and services.

Simultaneously, the Borsa Istanbul stock market experienced its worst decline since the 2008 global financial crisis, with the BIST 100 index plunging 16.6% in a single week. This market rout prompted regulatory intervention, including a ban on short-selling and relaxed share buyback rules to stabilize trading conditions.

The Central Bank of the Republic of Türkiye has responded aggressively, raising the overnight lending rate by 200 basis points to 46% in an unscheduled meeting and suspending lending at its lower benchmark rate. These emergency measures aim to tighten financial conditions and stem the lira’s freefall.

If these political tensions persist or intensify, Turkey could face several concerning scenarios. Further currency depreciation would likely drive inflation higher, creating a potential spiral that could severely impact economic stability. International investors, already cautious about emerging markets, may accelerate capital outflows, making it harder for Turkish businesses to access financing.

Turkey’s economic growth outlook could be revised downward as consumer confidence wanes and business investment contracts. Key sectors like tourism, which contributes significantly to Turkey’s foreign currency reserves, remain particularly vulnerable to political instability.

This shock comes at a time when Turkey was making significant progress in stabilizing its economy, controlling inflation and restoring international credibility.