Erdogan is largely responsible for the crisis afflicting the lira. Despite inflation running at over 20%, the president is bucking conventional economic wisdom by insisting that low interest rates are the way out of the predicament, and has sacked a succession of central bank governors who believed otherwise and would not cut rates.

Successive rate cuts pushed by Erdogan have led traders to abandon the lira, which had by late Monday lost nearly 60% of its value against the dollar this year. A 15% one-day drop against the dollar in late November was so drastic that gadget maker Apple suspended online sales there; when they resumed, prices were up 25%.

More chaos

On Monday, days after yet another rate cut at a time when central banks around the world are doing the opposite—and a 50% hike in Turkey’s minimum wage—Erdogan turned up the chaos dial.

First, he said he would continue the cuts, claiming he was basing his policy on Islam’s prohibition of unreasonably high interest rates. He also laid into the prominent TÜSİAD business group, which had on Saturday called for a return to the “established rules of economic science.” According to Erdogan, the organization “cannot interfere in what we are doing.” Erdogan claimed he will get Turkey’s inflation down to 4%.

That episode knocked the lira by over 10%, sending it to a new record low of 18.4 to the dollar. Then, after local markets closed, Erdogan unveiled a plan aimed at tempting Turks away from holding their savings in dollars rather than lira: He said the government would guarantee lira deposits against foreign-exchange depreciation that exceeds the deposit rate, though details of how it will do this remain scarce.

“We are presenting a new financial alternative to citizens who want to alleviate their concerns stemming from the rise in exchange rates when they evaluate their savings,” the president said.

And up went the lira, closing Monday with a 25% jump. On Tuesday morning, the lira leapt again by 20% against the dollar. Then it fell by 20%, before rising again by as much as 12%. At the time of publication, it had fallen again slightly, with a current exchange rate of around 13 lira to the dollar.

Short-term patch

Erdogan’s late-Monday move should stave off a bank run for the time being, wrote Timothy Ash, a BlueBay Asset Management economist, in a Tuesday blog post. He also noted that Erdogan, who has avoided capital controls, had “affirmed he believes in markets.” However, Ash warned, the program would probably still end up proving inflationary.

“This scheme likely has bought time and avoided an immediate crash in the banking sector, but it has done nothing to fight inflation, will further extend Erdogan’s unorthodox interest rate policy, and likely puts off early elections and increases the chances of an Erdogan win [in Turkey’s scheduled 2023 election],” Ash wrote.

“Note that Turkey ran a similar [deposit scheme] in the 1970s, and it did not result in many positives, actually just accentuated the boom/bust credit cycle,” he added.