The struggling Turkish lira extended its biggest rally of the year on Monday in response to a new rule effectively forcing many banks to divest some of their foreign currency.
The banking regulation, announced after Friday night’s market close, represents Turkey’s latest attempt to support the lira without raising interest rates.
Pressure from President Recep Tayyip Erdogan on the central bank to keep borrowing costs well below the inflation rate has sparked an economic crisis that has resulted in the lira collapsing and prices skyrocketing.
Erdogan rejects conventional economics and reiterates that high interest rates cause inflation instead of curbing it.
The annual rate of increase in consumer prices is now officially 73.5 percent. Independent economists assume that it could be almost twice as much.
The dollar fell to 16.1 lira early Monday before recovering slightly to trade around the 16.7 mark.
The US currency was worth around 17.4 lira before the measure was announced. It was 7.4 lira early last year and 5.9 lira in January 2020.
Turkey’s real interest rate of minus 59.5 percent is a big incentive for consumers to spend money before it depreciates and for banks to convert their holdings into dollars and euros.
The new rule seeks to stop this by limiting banks’ foreign currency assets.
Banks with more than 15 million lira ($900,000) in foreign currency — if that figure accounts for more than 10 percent of their assets or annual revenue — must sell their dollars and euros before lending more.
The move meant some big banks whose lira loans matured on Monday had to sell their foreign currency to make the payments.
BlueBay Asset Management economist Timothy Ash called the regulation “backdoor capital controls.”
The banking regulator clarified on Sunday that the measure does not apply to individuals or independent entrepreneurs.
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Erdogan’s economic team has ruled out strict currency controls and is committed to the markets.
The head of the Turkish big business association MUSIAD also welcomed the measure – seen by economists as a further step in Erdogan’s push to “liraise” the economy of the emerging countries.
The new rule will “prevent dollarization, which is the main reason for the rise in the exchange rate,” MUSIAD chief Mahmut Asmali told reporters.
However, Murat Gulkan, Head of Advisory Services at OMG Capital Advisors, said the measure could adversely affect Turkey’s business climate in the long term.
The new rules will “complicate the operating conditions of banks and companies,” Gulkan said.
“The cornerstone of the system is the policy rate of the central bank. Moving that cornerstone will require extraordinary steps like this latest decision.”
Ash agreed that the measure “overcomplicates things for businesses and banks when everyone knows Turkey needs rate hikes, plain and simple.”
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