Turkish lira has rebounded from a record low after the government announced the new lira deposit mechanism on Monday, but risks still lie ahead for the country's economic system due to the soaring inflation and concerns about the foreign exchange reserves.
On Monday, the Erdogan administration announced a new financial tool to encourage citizens to make deposits in lira after weeks of currency fluctuations.
Accordingly, the government will compensate the depositors if the yield remains below the exchange rate difference between the account opening and its maturity dates despite the earned interest.
Following the announcement, the lira/dollar exchange rate dropped to as low as 10.85 on Thursday, gaining over 40 percent of its value against the U.S. dollar since Monday.
However, for the local people, it is not enough for the lira to rebound. They are more concerned about prices.
"I'm going to the market to see the prices, like the sunflower oil. I would not buy sunflower oil in the past, but only olive oil. But now the sunflower oil which was only sold 37 lira is sold for 160 lira now, not to mention how expensive the olive oil is," said a resident in Istanbul on Thursday.
"For low-income groups like us, we hope the prices can drop because only when the prices are down can we make a living. If the prices still stay as high as they are now, I think it will not mean much to us, even with the lira up a bit," another resident said.
In November, the consumer price index (CPI) in Turkey rose 21.31 percent from the same period last year, setting a new high since the end of 2018. Local authorities have attributed the cause of inflation to the high interest rates, and the central bank has reduced the benchmark interest rate by 500 basis points since September this year.
Almost every time the lowering in interest rate would cause further depreciation of the lira. From the beginning of the year to its lowest point, the cumulative depreciation of the lira against the U.S. dollar had been nearly 60 percent.
For now, the new lira deposit instrument has calmed the currency depreciation but analysts warned if the lira's rise should fail, the plan may increase public debt, deprive foreign exchange reserves and further fuel the inflation.
