Turkey announces measures to support the economy, prioritizing the fight against 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) – Turkey’s Treasury said on Friday tackling inflation remained its top priority after authorities announced new measures to support an economy beleaguered by soaring prices and falling lira , although analysts expected the latter measures to have little effect.

The Treasury said it would issue national bonds indexed to the income of state enterprises to encourage savings in lira assets, the central bank raised the reserve requirement ratio for commercial lira loans from 10% to 20% and the bank watchdog changed a maturity limit for consumer loans.

“The fight against inflation remains the top priority. In this fight, the importance of coordination between institutions is clear and all our institutions act with the understanding of a common fight,” said a statement from the Treasury.

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The steps caused volatile lira trading. It firmed up to 16.8 to the US dollar before the announcements before falling back to 17.3 after their unveiling. It traded at 5:21 p.m. 08:00 GMT after the latest Treasury statement.

The pound has fallen 23% this year following last year’s 44% plunge, which was precipitated by a series of unorthodox central bank rate cuts carried out under pressure from President Tayyip Erdogan despite soaring inflation.

Meanwhile, the lira crisis is worsening inflation, especially this year, as Russia’s war in Ukraine has pushed up energy and food prices.

Analysts were skeptical how far the latest measures could move the needle, saying the measures failed to address the central problem of runaway inflation and low interest rates.

“As far as I know, there is no policy change available to bring inflation under control,” said Arda Tunca, an Istanbul-based economist and columnist at PolitikYol.

Sources told Reuters the government is considering pushing a supplementary budget through parliament ahead of a recess next month to cover possible summer payments.

“I always wonder what kind of bunny they’ll pull out of the hat next – so far I haven’t seen anything that would help stabilize the lira,” said Per Hammarlund, chief EM strategist at SEB.

Turkey is suffering from economic and market headwinds as Erdogan faces a tough election by mid-2023, with his approval rating already hit by soaring inflation to 73 .5% in May.

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.”

REAL PEOPLE

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

“It is not companies but only real people who are targeted this time, but in my humble opinion, it is difficult to attract deposit holders who do not have experience in stock investing” , she said.

The Treasury said the use of the lira and practices to increase its attractiveness would continue without compromising free market rules.

Separately, banks will be required to hold between 3% and 10% of fixed-rate bonds for foreign-currency deposit accounts, the central bank said, in a bid to stimulate demand for fixed-rate bonds and effectively cut costs Treasury borrowing, said a senior banker. Reuters.

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 said it had reduced its fees to encourage foreign financing for public offerings held in Turkey and to encourage companies to raise funds by issuing capital market instruments in Turkey. foreign.

Local bond yields have slipped on the latest announcements, with the yield on the benchmark 10-year bond dropping to just over 21% after ending the day at 25.72% on Thursday. Borsa Istanbul’s main banking index climbed 4%.

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Additional reporting by Nevzat Devranoglu, Can Sezer, Ebru Tuncay and Azra Ceylan in Turkey and Karin Strohecker in London; edited by Mark Heinrich

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