Jakarta, CNBC Indonesia – Turkish President, Recep Tayyip Erdogan, “said” earlier this week that the lira has skyrocketed nearly 30% in the last two days. The unusual policy of the Turkish Central Bank (TCMB) has caused the lira to fall almost 55% so far this year until last Friday.
This week the lira finally ‘rises from the grave’. According to Refinitiv data, yesterday’s lira rose 8.65% to TRY 12.43/US$ and the previous day skyrocketed 21.5%. Before skyrocketing last Monday, the lira had penetrated TRY 18.3/US$ which is the weakest record in history, then immediately reversed after Erdogan “said”.
Speaking after a Cabinet meeting, Erdogan announced several policies that would ease the burden on the Turkish lira. The leader, who has been in power for 20 years, said that with this policy, Turkish citizens would not need to convert the lira into foreign currency as long as the lira crash, including providing a deposit guarantee.
“We present a new financial alternative for citizens who want to ease their worries when they see savings due to rising exchange rates,” Erdogan said.
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Erdogan also mentioned the interest rate cut by the Turkish central bank (TCMB). TCMB’s aggressive policy of cutting interest rates when inflation was high triggered the lira’s plunge. But according to Erdogan, cutting interest rates will eventually bring down inflation.
“With interest rate cuts, we will see inflation start to fall in the next few months. This country will no longer be a haven for those whose wealth has increased due to high interest rates,” Erdogan said.
When inflation is high, the central bank will generally raise interest rates. But Turkey’s central bank (TCMB) is cutting interest rates aggressively.
Inflation in Turkey in November reached 21.31% year-on-year (yoy) rose from 19.89% (yoy) in the previous month and became the highest in the last 3 years. The drop in the lira exchange rate is one of the triggers for accelerating high inflation.
Although the lira continued to decline, TCMB last Thursday cut its benchmark interest rate again by 100 basis points to 14%.
So far, the TCMB, led by Sahap Kavcioglu, has cut interest rates for the fourth month in a row for a total of 500 basis points.
John Doyle, vice president of dealing and trading at Tempus Inc. said the Turkish government’s plan to make the lira appreciate sharply.
“The most important thing is that the government said it would compensate for losses in lira deposits if the currency weakened further than the bank’s interest rates. Although the government didn’t say how they would execute the plan,” Doyle said.
CNBC INDONESIA RESEARCH TEAM
(pap / pap)
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