The Turkish lira rocketed off record lows on Tuesday after President Recep Tayyip Erdogan announced new measures to safeguard local currency deposits against severe market volatility.
In a speech late on Monday, Erdogan said if lira losses against foreign currencies exceed banks’ interest rates, the government will cover those losses for lira deposit holders.
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“From now on, our citizens won’t need to switch their deposits from Turkish lira to foreign currency, fearing that the exchange rate will be higher,” he said.
Before the policy change, the lira had lost roughly 60 percent of its value against the US dollar, hitting an all-time low of 18.36 against the greenback on Monday. But Erdogan’s announcement late on Monday triggered a powerful rally that saw the lira strengthen to 11.09 on Tuesday morning before giving back some of those gains.
The head of the Turkish Banks Association, Alpaslan Cakar, told Turkish broadcaster Haberturk late on Monday that $1bn had already been converted to lire after Erdogan’s announcement.
Turkey’s central bank has slashed its benchmark interest rate by 5 percentage points to 14 percent since September, despite inflation running north of 21 percent.
The successive rate cuts triggered a run on the lira, wiping out the purchasing power and savings of common Turks, many of whom flocked to foreign currencies and gold in search of a safe haven.
The central bank intervened several times in foreign currency markets, selling billions of dollars from its precious foreign reserves to try and shore up the lira – but those efforts failed to stem the carnage.
With elections scheduled for 2023, Erdogan has promised to keep pushing for low-interest rates which he insists will fight inflation – a view that collides with mainstream economic theory that holds that lower borrowing costs actually feed inflation by eroding the value of a currency.
The Turkish president has fired three central bank chiefs in two years and purged other monetary officials – moves that saw investors punish the lira for the perceived lack of Turkish central bank independence.
As the lira rout turned into an all-out crash in November and December, it drove prices of essentials like food and fuel ever higher and raised input costs for Turkish businesses that depend on imported materials.
Last week, Erdogan announced that Turkey would raise its minimum wage by 50 percent starting next year – a move that will help the most vulnerable Turks cope with rising prices, but which economists say could also feed inflation.
Erdogan also said on Monday that government would boost its match on contributions to private pension from 25 percent to 30 percent, and introduced measures to help shield exporters from the exchange rate volatility.
Critics say Erdogan’s plans are unsustainable and could cause more inflation.
Some economists have said the new measures are effectively veiled rate hikes that may not ultimately stem the selling pressure while straining the back-stopping Treasury.
“It can have dangerous consequences,” said Refet Gurkaynak, head of Bilkent University’s economics department, in Ankara.
Jeffrey Halley, senior market analyst, Asia Pacific, OANDA, said it remained unclear how the government would carry out the new measures.
“The Turkish lira … had the mother of all rallies overnight, falling 11 percent intraday, but finishing the overnight session more than 20 percent higher after President Erdogan announced new policy measures to protect the lira savings from currency depreciation,” Halley said.
“A look through the new measures left me scratching my head about how they would ever be enacted and executed, especially in a short time.”