ISTANBUL (AP) — Turkey’s currency made significant gains Tuesday after President Recep Tayyip Erdogan announced extraordinary measures that aim to safeguard deposits in the lira against volatility seen in recent weeks and boost confidence among Turks as they have watched their buying power erode.
The Turkish lira hit an all-time low of 18.36 against the U.S. dollar Monday, meaning it had lost more than 60% of its value against the American currency this year. But it made overnight gains after Erdogan’s announcement, rebounding to a high of 11.09 Tuesday and later trading at 13.01.
The currency has been on a rollercoaster ride since the country’s Central Bank began lowering interest rates in September, with the lira hitting record lows as Erdogan dug in on the rate-cutting policy despite soaring inflation.
The weakened lira drove consumer prices higher, making imports, fuel and everyday items more expensive and leaving many people in the country of more than 84 million struggling to buy food and other basics. Many flocked to foreign currencies and gold to hold on to their savings.
In response, Erdogan said Monday that the government would cover losses by lira deposit holders in cases where the lira’s depreciation against foreign currencies exceeds bank interest rates.
“From now on, our citizens won’t need to switch their deposits from Turkish lira to foreign currency, fearing that the exchange rate will be higher,” Erdogan said.
But critics say the measure is unsustainable, burdening the public budget by making it more vulnerable to currency fluctuations. They say it could cause more inflation.
Ali Babacan, Erdogan’s former finance minister and now an opposition party leader, called the new measure a “hidden interest rate hike.”
Turkey’s president is avowedly against high interest rates and believes they cause inflation, a thought that stands in contrast to established economic principles. He bases his theory on Islam.
Under Erdogan’s assumed influence, the Central Bank has lowered interest rates by 5 percentage points since September, to 14%, despite annual inflation speeding beyond 21%. In recent weeks, the bank has sold dollars several times to try to stop the lira’s depreciation — to no avail.
The Ministry of Finance and Treasury announced details of Erdogan’s measure Tuesday, saying losses by lira deposit holders would be covered in time deposit accounts of three, six, nine and 12 months with interest rates matching or above the Central Bank’s policy rate.
In a statement, the ministry said exchange rates for the beginning and the end of the deposit would be compared and the higher number would be considered for the calculation of potential losses. Any bank that wants to join the system would be allowed to do so and the daily U.S. dollar rate to be considered would be announced each morning.
Erdogan also promised exporters Monday that they would get foreign exchange forward rates from the Central Bank to mitigate volatility risks, and he increased the government contribution to private pensions from 25% to 30%.
The head of the Turkish Banks Association, Alpaslan Cakar, told Turkish broadcaster Haberturk late Monday that $1 billion had already been converted to liras after Erdogan’s announcement.