The Turkish currency recovered sharply on the foreign exchange market on Tuesday after the emergency measures announced by the head of state and a month of historic losses.
In the early evening Monday, after a chaotic session, President Recep Tayyip Erdogan took the markets and his opposition by surprise by deciding to link the value of certain bank deposits in pounds to the dollar.
Economists and many Turks were still trying to decipher how this new trading mechanism will work and where the government will get the money to pay for it.
But the impact on the Turkish lira, which had lost 45% against the greenback from early November to late Monday afternoon, was considerable.
The currency, which had plunged another 10% when Erdogan appeared on television after the weekly government meeting, traded hours later up 20% against the dollar.
“Ultimately the Erdogan administration cares about the exchange rate and has avoided capital controls,” noted economist Timothy Ash of BlueBay Asset Management on Monday in a briefing note. President “Erdogan has shown that he believes in the markets, but not in interest rates.”
Turkish currency : indirect rate hike
The head of state invoked Islamist precepts prohibiting usury to maintain his beliefs – contrary to widely accepted economic theories – that high interest rates encourage inflation instead of containing it by slowing down the economy. activity.
In recent months, he has pushed the central bank four times to reduce its key interest rate well below the level of inflation which reached 21% in November over one year.
This meant that Turks who deposited books into their bank accounts were effectively losing money every month. And economists feared the country’s banking system would cripple in the event of a banking rush.
Erdogan’s new policy – called an “indirect interest rate hike” by former Treasury adviser Mahfi Egilmez – will protect the value of pound holdings against exchange rate fluctuations.
It guarantees the population that the government will cover any depreciation of its bank deposits in pounds against the dollar by periodic payments.
“If the exchange rate increases by 40% and the interest rate by 14%, the 26 points of difference will be paid in compensation,” Egilmez explained on Twitter.
The money will, however, have to be kept in the account for at least three months, the finance ministry warned in a statement.
This policy aims to reassure Turks when they deposit books in the bank.
The measure helped reassure people, without fully stabilizing the market: the Turkish lira gained another 22% early Tuesday, before erasing all these gains and then rising a few points at the end of the day, continuing its movement of yo-yo.
Tuesday night, it took 13 pounds to buy a dollar. But despite a sharp recovery in recent hours of nearly 40% from its historic low, the price of the Turkish currency has lost 40% against the dollar since the start of the year.
Many economists are wondering, however, whether President Erdogan’s new approach – which is trying to straighten a half-mast rating in the run-up to the 2023 presidential election – is sustainable.
“The deposit guarantee will increase the public burden”, argued to the press the former Turkish Minister of Economy, Ali Babacan. “The public treasury will pay with taxes: it is the dollarization of the country’s economy.”
Economists have also expressed doubts about the effectiveness of this decision in preserving the purchasing power of Turks.
“These measures have probably saved time and avoided an immediate crash in the banking sector, without doing anything against inflation,” said Tim Ash.
For analyst Jason Tuvey of Capital Economics, it is “a sign that leaders are trying to find a way to live on a weaker pound, but without going back to orthodoxy.”