(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.
Turkey’s central bank will prioritize the promotion of lira deposits next year after President Recep Tayyip Erdogan announced controversial new steps to curb the currency’s depreciation.
How Erdogan’s Plan to Halt the Lira’s Fall Is Meant to Work (1)
The bank will maintain its 5% medium-term inflation goal, even as actual inflation tops 20%, according to the monetary and foreign policy paper it prepared for 2022. But it jettisoned the tighter monetary policy pledge former governor Naci Agbal made in last year’s document.
The central bank has already taken steps to encourage lira deposits by making them more attractive than holding foreign currency. It has said it will support the conversion of FX and gold savings accounts to lira accounts and pay higher returns to commercial lenders that switch some of their foreign currency deposits at the central bank to lira. It will also charge an annual commission on banks’ required reserves in foreign currency.
Turkey Cenbank Takes New Step to Encourage Lira Deposits (1)
The lira swung wildly in December, prompting Erdogan to promise to protect lira deposits from volatility with FX-linked deposits that don’t solve underlying problems such as high inflation and the government’s credibility gap. Although the currency has gained from record lows, it is still about 38% weaker against the dollar since the start of the year.
A major factor in the depreciation has been the central bank’s slashing of borrowing costs since September, under pressure from Erdogan, whose popularity has been hurt by the surging inflation that’s accompanied the currency’s decline.
The central bank said it also aims in 2022 to replenish foreign-currency reserves depleted by the lira’s fall. International net reserves dipped about $9 billion in the week ended Dec. 17, the biggest weekly drop since at least 2002.
Other key takeaways from the central bank’s document:
- Reserves will accumulate in 2022 through rediscount loans
- Central bank may gradually reduce FX sales to state institutions
- Swap transactions conducted by the bank will be gradually reduced.
More stories like this are available on bloomberg.com
©2021 Bloomberg L.P.
