Turkey wants to make the pound more attractive than foreign currencies

ISTANBUL: Turkey’s central bank has said it will prioritize measures to encourage savers to use lira deposits in 2022, even as the currency resumes a decline that caused it to lose nearly 40% of its worth this year.

Steps will be taken to make the pound more attractive than foreign currencies, the bank said in a document that sets out monetary and exchange rate policy for the coming year.

Policymakers will also stick to a medium-term inflation target of 5% – even if the rate of increase in consumer prices exceeds 20% – while abandoning the tighter monetary policy commitment made by former Governor Naci Agbal a year ago.

December has been one of the most tumultuous months to read it in decades.

The currency fell 27% from November 30, near a record low on December 20, as the central bank continued interest rate cuts at the behest of President Recep Tayyip Erdogan.

Then it recovered to 73% from a record low last week when authorities announced a series of controversial measures to put it on a more stable footing.

Analysts have dismissed the central bank’s latest guidelines, which go against traditional economic approaches, as unworkable and said unorthodox measures to boost demand for lire can only offer temporary relief.

“Turkey’s attempt to lower inflation from over 20% to 5% while aggressively reducing monetary policy rates is doomed to fail,” said Per Hammarlund, chief emerging markets strategist at Skandinaviska Enskilda Banken AB. “The Turkish authorities cannot have the cake and eat it too. “

The central bank had previously signaled its commitment to encourage lira deposits.

He said this week he would support the conversion of foreign currency and gold savings accounts into lira accounts and pay higher returns to commercial lenders who convert some of their foreign currency deposits at the central bank into pounds.

Earlier this month, he unveiled a new mechanism that would see the government compensate holders of lira deposits if the currency’s declines exceed bank interest rates.

Although Erdogan’s popularity suffers from the high inflation that accompanied the pound’s decline, he stuck to his stance that interest rates are dragging the economy down and vowed to stabilize the currency through the latest series of measurements.

Yet his plans fail to address the root causes of the crisis, nor the government’s lack of credibility, and there are signs that his broader approach is backfiring.

The pound slipped 5% against the dollar on Wednesday, bringing this week’s losses to 15%, with traders saying people are not rushing to Erdogan’s new products.

Investors believe the market is anticipating future inflation and do not see the lira recover anytime soon despite recent measures, given the government’s insistence on cheap borrowing.

Polls ahead of the January 3 inflation data release forecast inflation to accelerate to around 27%.

The 10-year government bond yield has climbed more than seven percentage points since the central bank began cutting rates in September, reaching a record 24.9% on Wednesday.

Erdogan said his policies were aimed at boosting production and exports, reducing the influence of international markets on Turkish monetary policy. He sacked former central bank governor Agbal after just four months last March, two days after raising borrowing costs by two percentage points.

His successor, Sahap Kavcioglu, has duly cut the key rate by 500 basis points since September, despite much criticism from investors.

The central bank’s setting of an ambitious inflation target has become an annual rite in Turkey, although it has not been met for years, and seems more elusive than usual. – Bloomberg