The Turkish lira fell to a record low against the dollar, and the Istanbul stock exchange dropped sharply, just one day after Turkey’s general election.
Investors reacted negatively to the possibility of a minority or coalition government after the ruling AK Party failed to win a majority.
Turkey is already seen as an unattractive market due to sluggish economic growth, high levels of debt and a reliance on external financing.
Jane Foley, a senior currency strategist at Rabobank, explained:
“The Turkish Central Bank has many complicated tools at its disposal and what it’s done today is reduce the rate of its dollar deposits. A rate hike could arguably be the one tool, which could try and stabilise the Turkish lira. That would be very a controversial decision and very difficult for Turkey to potentially tolerate a rate hike in the current climate.”
The Turkish lira is down more than 15 percent this year, which is a major issue for companies with dollar-denominated debt.
There may be a push to deal with the high levels of inflation in the country by increasing interest rates.
However, this could cause friction with President Tayyip Erdogan who has likened high interest rates with “treason.”