Calls for Turkey Rate Hike to Stem Lira Slide

The Turkish government’s attempt to launch state tenders in the lira currency and President Erdogan’s call for Turks to sell foreign exchange will not be enough to shore up the tumbling currency, economists say.

On Sunday, the Turkish government announced it was taking steps toward launching state tenders in the lira currency, following President Recep Tayyip Erdogan’s call on Turks to cash in their foreign exchange holdings under the mattresses and buy lira, DW reported.

In the opinion of economists, the unconventional measures are unlikely to lift the pressure off the country’s struggling currency. QNB Finansbank economist Deniz Cicek said he didn’t believe demand for the lira would be boosted by state tenders.

“It’s obviously ideal to make all contracts in the national currency, but it should be highlighted that the reason those contracts were made in foreign exchange was about the fact that the trust in the lira is low. Under the circumstances it will be difficult for firms to find long-term funding in lira,” he told DW.

The Turkish lira has been under pressure due to rising regional tension, political uncertainties in Turkey amid widening concern about a crackdown following the July 15 failed coup, and a strengthening US dollar after the election victory of Donald Trump. The currency is among the biggest losers among its emerging peers.

Apart from his call on Turks to exchange their foreign currency holdings, Erdogan also urged the Turkish central bank to lower interest rates. After Erdogan’s speech, the lira tested new all-time lows against the dollar and fell to 3.60 lira versus the greenback.

Economists see interest rate hikes as the only way to support the lira. 

Last month, the Turkish central bank raised interest rates for the first time in nearly three years, lifting its benchmark rate by 50 basis points, to support the lira and subsequently boost economic growth. 

However, this hasn’t changed the lira weakness, and increased pressure to tighten monetary policy further in the coming months.

Rabobank strategist Piotr Matys said that the announcements had failed to restore market confidence.

“Prime Minister Binali Yildirim attempted to reassure foreign investors that capital controls will not be imposed. Such comments, however, are unlikely to restore market confidence that was shattered by turbulent events in Turkish politics and the outcome of the US presidential election,” he said.