Economy

Turkish political uncertainty casts economic cloud

March 20, 2025, 4:14 PM

Supporters of Ekrem İmamoğlu gather outside the Istanbul Metropolitan Municipality building to protest against his detention

İmamoğlu still in police custody
Likely to exacerbate economic instability
Central bank cushions fall in lira

The detention of a leading opposition figure in Turkey just days before he was to be named as a candidate in presidential elections is likely to set back the country’s campaign against sky-high interest rates and persistent inflation, analysts have warned.

Ekram İmamoğlu, the mayor of İstanbul and leading member of the opposition Republican People’s Party, was taken into police custody along with more than 100 others on Wednesday over allegations of corruption and links to a terrorist group.

The detention has sparked protests across Turkey, while also unsettling money markets and investors.

The Turkish lira closed on Wednesday at $1=TL38, a 4 percent retreat, having at one point fallen by 12 percent.

The lira’s fall was cushioned by the central bank and other lenders injecting more than $8 billion in foreign currency into the market, according to data.

On Thursday the central bank announced on social media that it would be conducting further foreign currency sales to “prevent possible volatility in exchange rates and balance foreign exchange liquidity”.

The İstanbul stock exchange recovered earlier losses to close almost 9 percent down on Wednesday.

But bank stocks extended their decline to more than 15 percent for the week at one point on Thursday, with a fall of more than 5.5 percent in the first half hour of trading.

The uncertain political situation is likely to exacerbate economic instability, according to Evren Bolgün, a professor of economics at Beykoz University.

“The targets for inflation and foreign currency rates will be badly impacted if the current situation remains unchanged,” Bolgün told AGBI. “The coming few days will be critical.”

Turkey has been struggling with high interest rates and inflation since an earthquake caused widespread damage in southern parts of the country two years ago, and a previous election campaign when its president Recep Tayyip Erdoğan presided over a period of artificially low interest rates.

In a note to investors issued late on Wednesday the international bank JP Morgan said the political uncertainty would have a longer-term impact on the Turkish economy.

Year-end inflation could come in at 29.5 percent, up on the bank’s earlier projection of 27 percent, while the March consumer price index would jump 3.2 percent month-on month rather than the more muted 2.3 percent previously predicted, JP Morgan said.

The note said this higher inflation is also likely to impact the central bank’s programme of interest rates cuts.

The pace of reductions is likely to slow, leaving the lender’s main rate at 35 percent at the end of the year, up from the forecast 30 percent, the bank said.