Turkish Government takes Action to Phase Out Credit Push as Lira Devalues

turkish-lira-currency

Highlights

  • Twitter users calling for the resignation of the Finance Minister as inflation continues
  • Investors are pulling out money due to declining returns
  • Thursday announcement is a sign that authorities are desperately trying to stabilize the nation’s economy

 

Rolling Back Policies

As Turkish lira continues to show a downturn, the authorities have unwound some policies that were previously meant to increase credit. The new strategy was taken because the earlier policies failed to persuade investors.
Turkish Lira met a low record in Friday trading, taking losses to 4.8 percent this week. The currency has plunged 19 percent this year.
Formerly, the central bank had spent billions of dollars of its foreign currency reserves to support the devaluing Lira. On Friday, it announced that it would further halve the liquidity limits offered to major banks in open market operations to reduce excessive volatility in the markets.
The currency crisis was caused by the Turkish economy’s excessive current account deficit and large amounts of private foreign -currency-denominated debt along with President Recep Tayyip Erdogan’s unorthodox ideas about interest rate policy.
The new measures are in conflict with those taken by Erdogan, who believes that higher rates are inflationary, which tied the hands of monetary policymakers who work to trim Lira’s losses.

An End to the Old Rule

The asset ratio rule was introduced earlier this year to boost crediting by financial institutions, to purchase government bonds, and to engage in swap transactions with the central bank. However, the new measures are initiated as this proved to be a failure and the realization that only rate hikes can help the nation to deal with inflation. Inflation in Turkey stands at 11.8 percent.

New Regulations

Regulators are now making provisions that will reduce lending. The banks will now be able to increase the interest rates on credits and deposits. The authorities have also loosened currency-trading restrictions on foreigners. The decisions were taken after the meeting between the banking regulator, central bank, and top executives from the financial institutions.
The Middle East’s largest economy has a large number of investors in the foreign market. Many online protests asking for the resignation of the finance minister are taking place foreseeing the sharp hikes in dollars which can tremble the Turkish economy.

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