Turkish Lira Gains Traction After Erdogan Announces Measures to Safeguard Deposits in National Currency

Turkish lira banknotes are seen in this illustration taken in Istanbul, Turkey, on Nov. 23, 2021. (Murad Sezer/Illustration/Reuters)

The Turkish lira gained traction on Tuesday after President Recep Tayyip Erdogan’s government announced a number of measures to safeguard deposits in the national currency against currency fluctuations.

The lira hit an all-time low of 18.36 against the U.S. dollar on Monday following weeks of volatility. But on Tuesday morning, it rebounded to a high of 11.09. It was trading at 12.80 at 10:54 GMT Tuesday.

In a speech late on Monday, Erdogan introduced a series of measures aimed at protecting Turks from the high cost of living and easing the burden of the weakened currency while encouraging them to hold savings in lira as opposed to foreign currency.

The government will pay the difference between the value of savings in lira and equivalent dollar deposits, should its decline against the currency exceed interest rates promised by banks, Erdogan said.

Foreign currencies held by households in Turkish banks from Dec. 3 to Dec.10 rose by roughly $673.16 million according to the latest data released by the Turkish central bank.

“We are presenting a new financial alternative to citizens who want to alleviate their concerns stemming from the rise in exchange rates when they evaluate their savings,” Erdoğan said Monday.

“With the interest rate cuts, we will all see how inflation will start falling within months,” he said. “This country will no longer be a heaven for those adding to their money with high interest rates, it will not be an import haven.”

He also urged “everyone with money, access to finance” to contribute to investments, and that the state subsidy rate on the personal pension system will be raised from 5 percent to 30 percent in order to boost its appeal.

Meanwhile, stoppage (deductions) on companies’ dividend payments will also be lowered to 10 percent.

The president—who has repeatedly faced criticism over his unorthodox approach of lowering interest rates in the face of rising inflation—also noted that export companies who find it “difficult to present prices due to fluctuations in foreign exchange rates, they will be given a future exchange rate through the Central Bank.”

Erdogan has consistently put pressure on the central bank to slash interest rates in the belief that it will boost exports, investment, and jobs within the country.

However, critics fear his approach will further erode the lira and trigger higher inflation, which currently stands near 21.31 percent in the country, with some expecting it to pass 30 percent next year.

Soaring inflation levels throughout Turkey have severely ravaged the economy, causing an increase in the cost of everything from food and medicine to rental prices in Turkey, the latter of which have surged to new heights—with some regions seeing average prices shoot up 100 percent.

As a result, some citizens have turned to NGOs for help paying their ever-increasing rental bills. In Istanbul, long lines have begun to appear in some neighborhoods as locals queue for government-issued bread, the price of which has risen considerably in supermarkets throughout the city in recent months.

Under pressure from the president, the central bank last week cut its benchmark one-week repo rate by 100 basis points, from 15 percent to 14 percent.

But on Sunday, Erdogan again defended his economic policy and cited Islam as a reason for not raising interest rates, despite what appears to be an impending economic crisis.

“We’re lowering interest rates. Don’t expect anything else from me. As a Muslim, whatever (Islamic teaching) requires I will continue to do that,” he said, referring to Islamic finance in which high interest, or usury, is typically avoided.

While the lira made gains on Tuesday, it has still lost roughly half its value to the dollar this year.

Reuters contributed to this report.