ISTANBUL, Turkey—Turkey’s troubled lira extended on Tuesday a stirring recovery that erased nearly a month of historic losses after President Recep Tayyip Erdogan introduced emergency currency support measures.
The mercurial Turkish leader stunned markets and his political opponents late Monday by effectively tying the value of some lira bank deposits to the dollar.
Economists and many Turks were still trying to decipher how this new exchange mechanism will work or where the government will get the money to pay for it.
But the impact on the lira—which had lost 45 percent against the greenback from the start of November to late Monday afternoon—was monumental.
It was trading down 10 percent on the day by the time Erdogan appeared on national television to announce his new economic proposals.
It was trading up 20 percent a few hours after Erdogan had finished.
“We finally understood that the Erdogan administration cares about the exchange rate, and has avoided capital controls,” economist Timothy Ash of BlueBay Asset Management said in a note to clients.
“Erdogan affirmed that he believes in markets, albeit not interest rates.”
Erdogan has cited Islamic rules against usury to defend his unconventional belief that high interest rates cause inflation.
Economists almost universally agree that high lending costs actually lower prices by encouraging consumers to save and curbing business spending.
Erdogan has pushed the central bank to slash its policy rate to far below the annual pace of consumer price increases—now at 21 percent and expected climb substantially higher.
This meant that Turks who put liras in their bank accounts were effectively losing money.
Economists feared that Turkey could see a potentially paralyzing run on the banks unless something was done quickly.
Erdogan’s new policy—dubbed an “indirect interest rate hike” by former treasury adviser Mahfi Egilmez—is meant to defend the value of lira holdings against fluctuations in the exchange rate.
It guarantees that the government will cover any depreciation of new lira deposits against the dollar when the investments mature.
The finance ministry said individual Turks had to hold their liras in the bank for at least three months for the policy to take effect.
“In case the money is withdrawn from the account before the maturity date … the right of (guaranteed) interest will be eliminated,” the finance ministry said in a statement.