(Bloomberg) — Turkey’s lira posted its biggest gain in decades Monday, rebounding from a record low in the same day after President Recep Tayyip Erdogan’s government announced extraordinary measures to bolster a currency rocked by repeated cuts to central bank interest rates in the face of accelerating inflation.
The lira at one point fell as much as 11% from Friday’s close to touch 18.36 per dollar, its weakest level ever, following weekend comments from the president indicating that he wants to see rates go even lower.
But new measures announced by the government on Monday helped put a floor under the currency, which proceeded to rally close to 47% from its intraday low to touch 12.28 per greenback. The currency ended the day around 24% stronger than Friday’s closing level, its biggest one day gain since 1983, according to Bloomberg data.
The latest major shift came after the government announced steps including the introduction of a new program to protect savings from fluctuations in the local currency. The government will make up for losses incurred by holders of lira deposits should the lira’s declines against hard currencies exceed interest rates promised by banks, Erdogan said after chairing a cabinet meeting in Ankara.
The measures are intended to mitigate retail investors’ demand for dollars and bring to an end to three months of turmoil for the nation’s currency. But just how local investors react — and whether the new policies are sustainable — remains to be seen.
How Erdogan’s Unorthodox Views Rattle Turkish Markets: QuickTake
Erdogan’s latest announcements “could help the currency, but I think it comes down to credibility and whether depositors believe that’s a policy that can actually be implemented,” said Brendan McKenna, a currency strategist at Wells Fargo in New York. “Right now, Turkish institutions don’t have a ton of credibility so there may be challenges getting lira depositors on board.”
Turkey’s currency has been battered for years as Erdogan, 67, assumes tighter reins over the economy and turnover at the top of the central bank has intensified. The Turkish leader is heading toward general elections in 2023, the first since his shock defeat in the 2019 municipal vote, which saw Istanbul and Ankara lost to the opposition for the first time in a quarter century.
The current central bank governor, Sahap Kavcioglu, took office in March after Erdogan fired his predecessor, Naci Agbal, after just four months. Agbal had been a proponent of rate increases to tackle inflation — while Erdogan, bucking economic convention, has argued that lower borrowing rates will help tame inflation. Now, with Kavcioglu, Turkey is on its fourth central bank chief in less than three years.
Earlier: Lira Slides After Erdogan Says Islam Demands Lower Rates (1)
The global market response to the latest measures took place after ordinary Turkish business hours. Going forward, investors will be keenly focused on how much of the positive response by global foreign-exchange markets is maintained when traders in the region have the opportunity to really weigh in. It also came in a holiday-affected week and ahead of year-end, factors which have historically affected liquidity in FX markets.
Prior to Monday’s rebound, the lira had lost about half of its value against the U.S. dollar since September, with declines gaining pace after Erdogan last month unveiled an economic model that relies on lower borrowing costs and a cheaper currency. Erdogan has said Islam demands lower rates.
“We are lowering interest rates. Don’t expect anything else from me,” Erdogan said Sunday. “As a Muslim, I’ll continue to do what is required by nas,” he said, using an Arabic word used in Turkish to refer to Islamic teachings.
The central bank has slashed the one-week repo rate by 5 percentage points since September in line with demands from Erdogan for lower borrowing costs to boost growth. The monetary authority has also intervened in the foreign-exchange market four times this month to stop the currency depreciation.
And with consumer price increases accelerating every month so far this year — they jumped more than 21% in November from a year earlier –Erdogan this month announced a 50% increase to the minimum wage in 2022.
Meanwhile, S&P Global Ratings and Fitch Ratings have both recently lowered the country’s outlook to negative, citing the lira’s depreciation.
“The lira delivered a historic reversal” and “given the lower trading volumes going into year-end, some traders are saying that’s it for trading the collapsing lira,” Edward Moya, a senior market analyst at Oanda Corp. in New York, wrote in a note to clients. But “until Turkey abandons its unorthodox monetary policy, some traders will fade the lira rebound.”
(Adds political backdrop to the latest move starting in seventh paragraph.)
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