Turkey’s lira swung wildly between gains and losses on Tuesday after President Tayyip Erdoğan pledged to protect Turks’ savings from declines in the lira against foreign currencies.
The lira had surged from a record low of 18.36 per dollar on Monday in the biggest rally since at least 1983. It climbed as much as 15 percent to 11.09 per dollar on Tuesday before diving to as low as 14.44 per dollar. It was trading up 3 percent at 13 per dollar at 12:29 p.m. local time in highly volatile trading.
The deposit guarantee was among a series of steps announced by Erdoğan after a meeting of his cabinet late on Monday. The measures were designed to help reverse a crash in the currency over the last few weeks and to discourage Turks from selling liras for foreign currency.
Erdoğan did not reveal how the government would fund the potentially expensive and inflationary plan.
Turks sold about $1 billion yesterday after his announcement, according to the Turkish Banks Association.
The lira has slumped to successive record lows this year, losing more than half of its value, after Erdoğan ordered the central bank to cut interest rates despite a spike in inflation. The central bank has lowered borrowing costs to 14 percent from 19 percent since September. Consumer price inflation climbed to 21.3 percent in November.
Economists and investors were shocked at the lira’s trading patterns over the past 24 hours, calling them unprecedented.
“Don’t think I have ever seen such intraday FX volatility ever in my 30+ year career,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.
“We are presenting a new financial alternative to citizens who want to alleviate their concerns prompted by a rise in exchange rates when they evaluate their savings,” Erdoğan said after the cabinet meeting. He reiterated his government’s policy of lowering interest rates.
The president also said the government would alleviate problems of lira volatility for exporters – the central bank would provide futures prices for the lira to help the companies set export contracts, he said.
Erdoğan’s pledge to guarantee returns for lira deposit holders is effectively a veiled interest rate hike that might fail in its aims and strain government finances, some economists said.
“An epic interest rate hike was carried out, without calling it an interest rate hike,” said Refet Gürkaynak, head of the economics department of Bilkent University in Ankara. “If the central bank continues to give money at 14 percent, this will not work either. They have got into a fight with the basic economy and cut the whole country’s head off.”
The central bank next meets on interest rates on Jan. 20.
“A look through the new measures left me scratching my head about how they would ever be enacted and executed, especially in a short time,” said Jeffrey Halley, senior market analyst at Oanda Corporation.
In a further unorthodox attempt to stablise the lira, Turkey’s banking regulator said it would prosecute persons in the press and social media who sought to manipulate the currency to lower levels, the state-run Anadolu news agency reported.
(This story was updated to include latest lira price in the second paragraph, regulator statement in last.)