ANKARA, March 24 (Xinhua) -- Türkiye's economic outlook faces mounting uncertainty as recent political tensions threaten to derail efforts to curb high inflation, economists warned.
Istanbul Mayor Ekrem Imamoglu, a leading figure in the opposition Republican People's Party, was detained on Wednesday, along with some 100 others, over allegations of corruption and terror ties, rattling financial markets and investors. On Sunday, Imamoglu was formally arrested and jailed pending trial.
In response to market unrest, Türkiye's central bank officials met with commercial lenders in Ankara on Sunday afternoon to discuss stabilization measures, according to the Banks Association of Türkiye.
On Thursday, the central bank pledged to continue selling foreign currency to "prevent potential volatility in exchange rates and maintain foreign exchange liquidity." A day later, in an unscheduled meeting, the bank raised its overnight lending rate by 200 basis points to 46 percent, in a move to tighten liquidity and counter financial instability.
Following last week's bleak performance, the Turkish lira was sent to 38 per U.S. dollar in early Monday trading.
The lira on Wednesday tumbled to 42 per dollar at the lowest point following the municipal detentions. It recovered most of the day's loss after the central bank intervened with a heavy injection of up to 12 billion dollars into the market, according to media reports and economists' calculations.
Treasury and Finance Minister Mehmet Simsek sought to reassure investors, stating Sunday on social media that "we will continue to take all necessary steps for the healthy functioning of the markets."
Türkiye's stock market also felt the impact, with the benchmark BIST-100 Index plunging about 16.5 percent last week, the worst drop after the 2008 global financial crisis.
To stabilize trading, the capital market regulator on Monday imposed a ban on short-selling for a month to prevent stocks from falling.
However, Mustafa Sonmez, an Istanbul-based economist, warned that continued political turmoil could derail the Turkish government's inflation-fighting drive launched in mid-2023 amid a cost-of-living crisis.
"The central bank has burned billions of dollars to prevent further depreciation of the lira, using significant amounts in its foreign currency reserves," he told Xinhua.
In Sonmez's view, the bank has enough reserves to "extinguish the fire for now," but its further interventions could in the long run be challenging.
With a weaker currency, Türkiye's import costs will rise, adding pressure to inflation, the economist said, explaining that Türkiye is import-reliant in several fields, particularly energy.
The country has struggled with persistent inflation for years, exacerbated by a 2018 currency crisis and the 2023 deadly quakes.
In a note to investors on Wednesday, JP Morgan cautioned that political instability could have long-term economic consequences for Türkiye.
The American financial institution raised Türkiye's year-end inflation forecast to 29.5 percent from 27 percent, while revising the estimate of the monthly rise in the consumer price index for March to 3.2 percent, up from 2.3 percent.
The report further suggested that higher inflation could slow the central bank's plans to cut interest rates.
Policymakers had managed to lower inflation from over 75 percent in May 2024 to 39 percent in February through a series of austerity measures.
Encouraged by this decline, the central bank started reducing its key lending rate, cutting the policy rate to 42.5 percent with 250-basis-point reductions in December, January, and March, respectively.
However, an anticipated rate cut in April may now be delayed, said Atilla Yesilada, another Istanbul-based economic analyst.
"We expect another cut, but this could be reversed in light of recent developments. We'll have to wait and see," he told Xinhua.
"Right now, markets are volatile, but this could subside in the coming days," Yesilada added.
