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Erdogan Unveils Extraordinary Steps to Protect Turkish Lira, Savings

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(Bloomberg) — President Recep Tayyip Erdogan’s government announced extraordinary measures to bolster the Turkish lira, including the introduction of a new program that will protect savings from fluctuations in the local currency.

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The government will make up for losses incurred by holders of lira deposits should the lira’s declines against hard currencies exceed interest rates promised by banks, Erdogan said after chairing a cabinet meeting in Ankara.

The lira trimmed its drop — which had extended to as much as 10.6% — after Erdogan’s announcement and was trading down 5.9% at 17.4240 per dollar at 8:45 p.m. in Istanbul.

“From now on, none of our citizens will need to switch their deposits from the Turkish lira to foreign currencies because of their concerns that the exchange rate” fluctuations might wipe out gains from interest payments, Erdogan said.

The measures are intended to mitigate retail investors’ demand for dollars and bring to an end three months of turmoil for the nation’s currency. The lira has lost more than half of its value against the U.S. dollar since September, with declines gaining pace after Erdogan last month unveiled an economic model that relies on lower borrowing costs and a cheaper currency.

But his announcements show the subsequent chaos in Turkish markets has been sobering for policy makers, who are now introducing new measures to shore up some of the lost confidence in the lira.

Below is a summary of other steps announced by Erdogan on Monday:

Authorities will offer non-deliverable forwards to help exporters mitigate foreign-exchange risks emanating from the elevated levels of volatility.

“Turkey has neither the intention nor the need to take the slightest step back from the free market economy and the foreign-exchange regime,” Erdogan said.

Withholding tax for investments in lira notes issued by the government will be reduced to 0% from 10% currently.

Government will match 30% of all contributions made by private-sector workers to the optional pension system, up from the current level of 25%.

In the eyes of the president, Turkey can free itself from a reliance on foreign capital flows by abandoning old policies that prioritized higher interest rates and strong inflows. At the heart of his ideas is a belief that lower interest rates will also curb consumer price growth — the exact opposite of the consensus view among the world’s central bankers.

He has put that idea to the test since September when the central bank began cutting interest rates in the face of soaring consumer prices. The ensuing monetary stance eventually left the lira unanchored, with the currency sinking to fresh record lows almost every day.

The currency’s collapse fed into consumer prices almost overnight, resulting in rampant inflation that supermarket employees were barely able to keep up with changing labels. Working class Turks and pensioners began forming long lines in front of municipality stalls to get subsidized bread in recent weeks while the country’s top business associations started publicly attacking the government for destabilizing the economy.

(Updates with new comment from president, lira.)

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