Turkish lira rebounds after measures announced by Erdogan

The Turkish lira rebounded on Monday evening after President Erdogan announced further monetary support measures, which analysts interpreted as an indirect interest rate hike.

The Turkish lira rose by around % Monday evening after the announcement of these measures, more than erasing a loss of % previously suffered during the day.

The fluctuations had forced a brief suspension of quotations on the market in the afternoon, for the second time since Friday.

The Turkish currency had until then stopped sinking to historically low levels, to more than 17 pounds for a greenback, a fall of more than 45% since November 1. After the rebound, in the evening it still showed a drop of a third of its value against the dollar since the beginning of November.

Recep Tayyip Erdogan had until then on the contrary pushed the central bank to Significantly reduce borrowing costs despite annual inflation rate of over 19%.

Turkish President Recep Tayyig Erdogan on 16 December 2021 in Ankara (AFP / Archives – Adem ALTAN) The strong man of Turkey had even seemed to redouble his efforts in this approach over the weekend, by claiming that his Islamic faith prevented him from supporting rate hikes.

“As a Muslim, I will continue to do what our religion tells us,” he told the television. Islamic teachings prohibit Muslims from receiving or charging interest on money loaned or borrowed.

But on Monday, analysts believed it gave in to market pressure and increased interest rate indirectly, because he announced a series of complex measures to come to the aid of the national currency.

These measures include a new debt instrument which aims to compensate for the depreciation of the value of bank deposits caused by that of the lira.

Mr. Erdogan did not explain how this instrument would work. But former Turkish Treasury adviser Mahfi Egilmez called the measure an “indirect rise in interest rates.”

If the exchange rate fluctuates by 40% and the interest rates of 14%, 23 percentage points will be paid in compensation, he tried to explain on Twitter.

Turkish economist Refet Gurkaynak called the move an “epic interest rate hike”.

Turkish lira banknotes, on 18 December 2021 in Istanbul (AFP / Archives – Yasin AKGUL) The Central Bank of Turkey had made four successive cuts, to lower its key rate by 19 % at 14%, in order to support the economy, despite the inflationary risks.

Diplomats believe that Mr. Erdogan is counting on economic growth at all costs to help him prolong his presence in power on the occasion of the election scheduled for mid – 2023.

– Reprimands from an industrial lobby –

The Turkish president launched an “economic war of independence” last month, attacking Turkey’s dependence on foreign investment and fluctuations in the cost of imports such as oil and natural gas.

But its policy has changed. countered growing resistance from influential business leaders.

People are lining up in front of an exchange office in Ankara on 19 December 2021 in Turkey (AFP – Adem ALTAN) Faced with the stubbornness of the head of the state to advocate lowering interest rates, the Tüsiad employers’ organization, which claims 85% of exporting companies from Turkey, called on him over the weekend to rectify his monetary policy, via an unusually strong reprimand.

“The political choices implemented here do not only create new economic problems for businesses, but for all of our citizens, ”said the large business lobby. “It is urgent that we assess the damage that has been done to the economy, and that we quickly return to the implementation of established economic principles, within the framework of a free market economy.”

Mr. Erdogan responded to Tüsiad directly after announcing his new measures, following a weekly cabinet meeting.

“You are plotting to overthrow the government”, he reproached them. “You are dreaming. You will have to wait until June 2023”, he told them.