Erdogan faces lira dilemma

The Turkish lira has been falling for several years now against the dollar, a trend which continued this morning with news of a presidential runoff.

Timothy Ash, economist and Turkey analyst, says that Erdogan is unlikely to hike central bank interest rates in defence of the lira.

"So that means either let the lira continue weakening, or call a friend (Putin or Gulf) to get new $$ to defend the currency or impose capital controls," Ash writes in his latest newsletter.

"Putin will want to keep Erdogan dependent so won't give Erdogan enough cash. Gulf guys will demand policy orthodoxy as price for cash (as with Egypt), so it means IMF, higher rates, weaker currency. He won't do that."

People queue at a currency exchange booth, following the first round of presidential and parliamentary elections, in Istanbul, 15 May (Reuters)

As a result, Ash argues, Erdogan will continue his economic policy, which in recent years has been dogmatically pro-low interest rates.

"[He will] let the currency weaken, selectively use capital controls and macro prudential and suck up higher inflation by trying to regulate markets and price increases."

For millions of Turkish voters, the economy will be the key policy issue in the second round of voting on 28 May.

Turkey faces soaring inflation and living costs, and is still dealing with the huge financial damage of the devastating earthquake in February.