Recent political events in Türkiye stymied the country's path to slowing inflation and the fallout affected the economy as well as foreign exchange reserves, the European Bank for Reconstruction and Development's chief economist said.
The detention of Istanbul mayor and main opposition leader Ekrem Imamoglu on March 19 sent the lira sharply lower and triggered market turmoil that pushed the central bank into a surprise interest rate hike in April, short circuiting an easing cycle that began at the start of the year.
Türkiye had been on a "slow but steady" path towards reducing inflation before the event, EBRD Chief Economist Beata Javorcik told Reuters.
"This path allowed it to cut interest rates, but that process was stopped by the recent political events, which brought turbulence and forced the central bank to reverse the direction," Javorcik said, adding raising interest rates put the brakes on the economy.
"This is costly in terms of economic performance, in terms of reserves ... and in terms of the reputational implications, undermining confidence of investors."
Türkiye has struggled with very high inflation in recent years, which peaked at 75% last May.
The bank downgraded its forecast for Türkiye’s economic growth this year by 0.5 percentage points to 2.8%, due to lower domestic and external demand and tighter-than-expected monetary policy.
Türkiye’s bonds and stock market had become a big draw for global money managers in the months leading up to Imamoglu's detention.
The appointment of Finance Minister Mehmet Simsek in 2023, widely seen as the architect of the government's return to a more orthodox economic policy, helped lure investors.
The EBRD said Türkiye’s central bank sold more than $40 billion in foreign exchange in the weeks following Imamoglu's arrest, pulling net reserves, excluding swaps, from more than $60 billion to less than $20 billion.
The latest reserve numbers, published on Monday, showed that Türkiye’s gross reserves had risen by $6 billion - the first such gain in nearly two months.
