Turkey unveils its latest salvo against soaring inflation


A man looks at a butcher shop window in Ankara, Turkey February 16, 2022. REUTERS/Cagla Gurdogan

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  • Treasury launches income-indexed bonds for state enterprises
  • The central bank and banking watchdog also announce measures
  • Inflation soared to 73%, lira down 23% this year
  • Analysts are skeptical about what the latest measures can accomplish

ISTANBUL, June 10 (Reuters) – The Turkish government has launched a series of measures aimed at exploiting its banks and bond markets to curb soaring inflation and stabilize a falling currency, doubling down on President Tayyip Erdogan’s reluctance to raise interest rates.

While the Treasury said tackling inflation remained its “top priority”, some analysts said the measures – announced Thursday evening and in the early hours of Friday – would do little to relieve a struggling economy with a high cost of living.

Among the measures, the Treasury said it would issue national bonds indexed to the income of state-owned enterprises to stimulate savings from lira assets, the central bank raised the reserve requirement ratio for lira commercial loans to 20% from 10%, and the banking watchdog tweaked a maturity limit for consumer loans.

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“All of our institutions act with the understanding of a common struggle,” the Treasury said.

In response to the coordinated measures, the lira first rallied and then slipped to settle at 17.06 to the dollar, near its lowest since a currency crisis in December. It has lost 23% this year after falling 44% last year.

Highlighting how risky the emerging market economy has become in large part due to Erdogan’s unorthodox policies, 5-year credit default swaps soared to a record high of 830 basis points while bonds international organizations were under pressure.

Taken together, these measures aim to bolster confidence and individual Turkish lira holdings while slowing some forms of credit growth, which helped push inflation to a 24-year high above 73% in the month. last.

The inflationary spiral was precipitated by a series of central bank interest rate cuts late last year under pressure from Erdogan, who says monetary stimulus is needed to boost exports and investments ahead of the mid-2023 elections.


Analysts were skeptical how much the latest measures could move the needle given that they circumvented the need to raise rates and could prove costly for the state.

“There are no policy changes available to bring inflation under control,” said Arda Tunca, an Istanbul-based economist and columnist at PolitikYol. “All of these schemes force the Treasury to shoulder the burden of returns to be paid to investors.”

Bankers said term deposit yields had risen in recent weeks and the latest measures could increase bank costs and further increase lending rates.

Earlier this week, sources told Reuters the government was considering pushing a supplementary budget through parliament ahead of a recess next month to cover possible summer payments.

The pound crisis has pushed up import prices, a trend exacerbated by Russia’s war in Ukraine which has pushed up Turkey’s energy and food import bills.

“So far, I haven’t seen anything that would help stabilize the lira,” said Per Hammarlund, chief emerging markets strategist at SEB. “Erdogan seems stuck on these low interest rates.”

Economic turmoil has hit Erdogan’s approval ratings ahead of presidential and parliamentary elections.

Turks like Onder Ozturk, 42, a barber in Istanbul, have borne the brunt of soaring prices.

“We’re never going out to eat again,” said Ozturk, who has cut discretionary spending in half, including visits to his hometown. “We limited our expenses to clothing and personal needs.”


The Treasury said free market rules would not be undermined by measures to boost the attractiveness of the lira.

Commenting on the decision to issue lira income-linked bonds this month, Ozlem Derici Sengul of Spinn Consulting noted that the debt was issued in 2009.

“It’s not companies but just real people who are being targeted this time, but…it’s hard to attract custodians who don’t have experience in equity investing,” he said. she declared.

The central bank said lenders must hold between 3% and 10% fixed rate bonds for foreign currency deposit accounts. A senior banker told Reuters it would increase demand for fixed-rate bonds and effectively reduce Treasury borrowing costs.

Separately, the banking watchdog has reduced the maximum maturity for consumer loans over 100,000 lira ($5,814) to 12 months from 24, and plans to ease restrictions on the access of foreign investors in the lira via the swap facility.

The Capital Markets Board reduced fees to encourage foreign financing of Turkish public offerings and to incentivize companies to raise funds by issuing capital market instruments abroad.

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Additional reporting by Nevzat Devranoglu in Ankara, Can Sezer, Ebru Tuncay and Azra Ceylan in Istanbul, and Karin Strohecker in London; Written by Jonathan Spicer; Editing by Mark Heinrich

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