Turkey can still try to restore investors’ confidence in its management of the lira and the economy. But no one is certain it is willing to do so. For now, the government has begun cutting the money supply through the back door. Earlier this year, in an attempt to soften the blow from the covid-19 pandemic, state-run banks had flooded the market with cheap loans. The ensuing credit boom, the biggest in a decade, put renewed pressure on the lira and pushed inflation up. Days after the latest run on the currency, however, the banking regulator relaxed its rules on asset ratios, which had required lenders to pump out loans or face heavy fines. The central bank, meanwhile, has reverted to using a baffling system of policy rates, through which it can raise borrowing costs indirectly.
The combination of smoke and mirrors will not do. With the central bank’s benchmark policy rate at 8.25% and inflation at nearly 12%, Turkey has one of the lowest real rates among big emerging economies. Since the start of the year, the lira has shed nearly a fifth of its value against the dollar. Foreign investors have pulled $11bn from Turkish shares and bonds. Local depositors are running to the greenback for safety.