Turkish Government launched lira protection plan after deciding 18/dollar was a “red line”

According to four sources speaking to Reuters, the Turkish government launched its latest scheme to protect lira savings from losses via depreciation against the dollar after deciding that the 18.00 in USD/TRY level was a "red line". According to the sources, the Turkish government came up with the scheme last week, but decided to wait for USD/TRY to hit what they called the "absurd" 18.00 level before unveiling the new scheme. 

To recap; the lira surged more than 25% in value on Monday against the US dollar, with USD/TRY dropping from above 18.00 to the 13.00s and has since continued to drop into the 12.00s. That still leaves it about 30% above early November levels, but also more than 30% below Monday's highs. The Turkish government's decision to reimburse the losses incurred by holders of lira savings as a result of exchange rate fluctuations was seen by markets as a "rate hike through the back door". The main difference to a traditional rate hike is that the increased interest rate that Turkish savers will get over the CBRT rate will come from the government and depend on exchange rate fluctuations.

Still, it should encourage savings in the near term, which may help to take some of the sting out of inflation in Turkey. The big concern now will be whether the Turkish government will be able to find the money to reimburse savers their lira exchange rate depreciation incurred losses. 

Market Reaction

The lira has not reacted to the reports in recent trade.