The Turkish lira is set for its biggest weekly drop in almost two years following the arrest of a prominent opposition figure, causing concern among investors. The currency was down 0.5% at 38 per dollar in Istanbul on Friday, marking a 3.7% decrease over the past five days, the most significant decline since June 2023.

The decline in the lira started on Wednesday when Istanbul Mayor Ekrem Imamoglu, who is a leading rival to President Recep Tayyip Erdogan, was detained by Turkish authorities. This led to a sell-off of up to $9 billion by lenders and prompted the central bank to raise interest rates unexpectedly in order to support the currency.

Goldman Sachs Group Inc. economists Clemens Grafe and Basak Edizgil mentioned that the central bank's action was intended to control the outflow of lira deposits. By increasing Turkey's overnight lending rate by 200 basis points on Thursday, policymakers aim to raise the overall funding cost for commercial lenders, preventing a further decline in the lira that could fuel inflation. Additionally, the central bank announced the suspension of lending at the lower one-week repo rate standing at 42.5% for an unspecified period.

Following the central bank's decision, offshore lira borrowing costs eased to 54% on Friday morning after reaching 175% earlier in the week, bringing some stability to the offshore lira market. Meanwhile, the Borsa Istanbul 100 Index closed 0.5% lower on Thursday, following an 8.7% drop the day before that wiped out around $10 billion in Turkish equity market value. The yield on Turkey's 10-year government bonds in lira rose to 31.31%, up by 338 basis points for the week.