(BFM Bourse) – Ultra-volatile for weeks, the Turkish pound (or lira) has sharply recovered nearly 25% against the dollar since its low on Monday, in reaction to measures announced by President Recep Tayyip Erdogan to encourage the ‘saving.
A beautiful remounted, to use the expression popularized by the football community. While the tumble of the Turkish currency never ended (it took 18 Turkish lira to get a dollar on Monday, against a little more than 7 pounds at the start of the year and only 4 in 2018), the plan unveiled by Recep Tayyip Erdogan’s aim to support the battered currency by protecting local deposits from market movements has resulted in a dramatic turnaround.
The pound then recovered nearly 35% against the greenback, reaching a daily high of 11.0935 per dollar at the start of Tuesday’s session, before partially reversing this rebound around 5:20 p.m., when the exchange rate was in. order of 12.78 pounds per dollar.
Experts believe that the Turkish currency has suffered for years from Recep Tayyip Erdogan’s refusal to raise interest rates (a measure he describes as “the mother of all evils”) and from the control he exercises on the monetary policy of the local central bank, which is independent only in name. His stubbornness pushed inflation to 21.3% in November, from 14% a year earlier.
Among the unconventional economic measures announced Monday evening in a speech, Erdogan notably indicated that the Turkish state would intervene and compensate for the losses suffered by deposits in pounds if their value against hard currencies fell beyond the rates of interest set by banks. If economists, and many Turks, were still trying to understand how this new trading mechanism will work and above all, how the government intends to finance it, the announcement has had its effect on the markets.
“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. According to him, this speech “showed that President Erdogan believes in the markets, but not in interest rates”.
Because the Turkish head of state remains convinced – defeating widely accepted economic theories – that high interest rates encourage inflation instead of containing it by slowing down activity. In recent months, he has pushed the central bank four times to reduce its key rate, from 15 to 14% last Thursday, well below the level of inflation. In other words: Turks who deposit books in their bank account see the value of these deposits melt every month. It can be noted that this is also currently the case for US or European savers with the rise in consumer prices, but to a much lesser extent however.
Erdogan’s new policy – qualified as an “indirect rise in interest rates” by former Treasury adviser Mahfi Egilmez – must therefore protect the value of book holdings against fluctuations in exchange rates. “If the exchange rate increases by 40% and the interest rate by 14%, the 26 points of difference will be paid in compensation”, explains Mahfi Egilmez on Twitter. This mechanism will not be triggered, however, until three months after the filing, the Ministry of Finance said in a press release on Monday.
However, many economists doubt the sustainability of this new approach. “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.” Tim Ash believes for his part that the basic problem not being addressed, this “bad policy” will offer only a very temporary respite to the currency. “This program has probably saved time and avoided an immediate crash in the banking sector, but nothing is being done to fight inflation,” he laments.
(with AFP)
Quentin Soubranne – © 2021 BFM Bourse