ISTANBUL – Turkish stocks are experiencing their steepest weekly decline since the 2008 global financial crisis as market jitters over the detention of Istanbul Mayor Ekrem Imamoglu, a key political rival to President Tayyip Erdogan, continue to mount.
The Turkish lira has suffered a 4% drop this week despite recent intervention from the central bank. Meanwhile, stock market volatility triggered two market-wide circuit breakers on the Borsa Istanbul, halting trading temporarily.
Opposition groups have decried Imamoglu’s arrest as a politically motivated crackdown aimed at silencing dissent. His detention on Wednesday led to widespread protests across Turkey, with thousands taking to the streets in response.
Turkey’s sovereign dollar bonds also dropped for the third consecutive day, with longer-term issues shedding 2 cents and heading for a weekly decline of over 3 cents—their worst performance since January 2024. The cost of insuring Turkey’s debt against default widened by 18 basis points to 322 bps, marking its highest level since March 2024, according to data from S&P Global Market Intelligence.
The Turkish lira remained flat against the U.S. dollar at 38.0050 by Friday, still above Wednesday’s record low of 42 but down 6.7% for the year. Economists estimate the central bank has sold approximately $10 billion in foreign exchange since Wednesday’s currency plunge. Additionally, the bank took liquidity measures, including suspending its one-week repo auction and raising the overnight lending rate to 46%, effectively tightening policy by 350-400 basis points.
Analysts warn that these moves could increase funding costs, impact bank balance sheets, and drive up loan interest rates while reducing credit availability. Finance Minister Mehmet Simsek sought to reassure investors on Friday, describing the market fluctuations as temporary and affirming the government’s commitment to its economic program.
Turkey’s central bank also indicated it would tighten policy further if inflation risks persisted. Overnight interest rates climbed 134 basis points to 43.64% on Thursday.
Rate Cut Expectations Dashed
Hopes for a policy rate cut at the central bank’s April 17 meeting have diminished following this week’s market turmoil. The bank had previously cut its policy rate by 750 basis points since December, bringing it down to 42.5%, following an 18-month tightening cycle. Before the recent crisis, analysts had anticipated further cuts through the year.
“This effectively eliminates the possibility of a rate cut in April and has triggered a sell-off in banking stocks,” said Serhat Baskurt, Head of Algorithmic Trading at ALB Yatırım. He noted that the central bank’s recent actions suggest stronger-than-expected foreign exchange demand.
JPMorgan analysts, responding to Thursday’s overnight rate hike, now expect the central bank to hold its policy rate at 42.5% in April and potentially resume its easing cycle in June. While they do not anticipate a major policy shift, they cautioned that recent events could cause broader investor sentiment concerns.
“These monetary measures are unconventional, but it is reassuring to see the central bank addressing the risk of dollarization among Turkish residents,” JPMorgan stated in a client note.
As Turkey grapples with mounting economic and political instability, market participants remain on edge over potential further developments.-Reuters