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Introduce a new financial instrument to ease the burden of volatile exchange rates

By on December 20, 2021 0

Turkish President Recep Erdogan said on Monday he would introduce a new financial instrument to ease the burden of volatile exchange rates. Financial fluctuations and price hikes, he said, have no basis in economic fundamentals and Turkey will not bow to attacks and plots against it.

Citizens would not have to convert their lira savings into foreign currency due to volatility, he reassured, adding that he would encourage lira savings. Erdogan added that he was forecasting a 1.0% corporate tax cut and that credits would be given to support employment. There is no need to reverse the rules of the free market, Erdogan added, saying that in a few months lower interest rates will lead to lower inflation.

Market reaction

In recent trading, the USD / TRY has accelerated north of the 6:00 p.m. level, where it is trading up nearly 10% on the day. Erdogan recently doubled down on his aid that there is “no turning back” to his new economic agenda, which is characterized by attempts to reduce inflation by lowering interest rates rather than by increasing them.

Many see this policy as misguided (economists are almost unanimous in their agreement that rates should be raised to bring inflation under control, not lowered) and putting the Turkish economy at risk of hyperinflation and financial crisis. The year-on-year CPI rate is already above 20% in November. Speaking of lowering rates, that’s exactly what the CBRT did last week. The bank cut interest rates to 14.0% from 15.0% in a move that, along with Erdogan’s rhetoric, has taken a heavy toll on the lira in recent sessions.