Economists say Erdoğan's new policy means veiled interest rate hike

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Economists have said that a new anti-dollarization plan announced by President Recep Tayyip Erdoğan on Dec. 20 actually means an interest rate hike. 

After chairing a cabinet meeting, Erdoğan unveiled a plan he said would guarantee local currency deposits against market fluctuations. The president said the series of steps will ease burdens from a currency crash over the last few weeks and encourage Turks to hold lira savings rather than dollars.

He did not detail how the government would fund the potentially expensive and inflationary initiative.

Following Erdoğan's announcement, Turkey's lira gained more steam and was up 15% on Dec. 21, extending its historic recovery from record lows.

Economists have commented on the new announcement, saying that the move actually means an interest rate hike. 

"They moved back from their policies without saying that they did," Durmuş Yılmaz, the former central bank governor, said on Dec. 20, noting that the ruling Justice and Development Party (AKP) did a U-turn. 

"They saw that their economic model was leading to a dead-end street. This is an interest rate hike. The AKP did a U-turn from its policies," he added. 

Yılmaz noted that Erdoğan and the AKP may brag about the strengthening of the lira now. 

"They may say that they've decreased the rates and made the lira gain value. We'll see whether people will buy that argument," he said. 

Erinç Yeldan, an economist from Kadir Has University, asked the reason why the central bank decreased the rates if this was the path that was going to be followed. 

"If the difference between the exchange rate and the deposits will be paid by the state, this means that the interest rate will be hiked in line with market conditions. So why did the central bank decrease rates?" Yeldan asked. 

Another economist to deem the move an interest rate hike was Yalçın Karatepe.

"This is a veiled rate hike. Don't get too excited," he said. 

Economist Rafet Gürkaynak said that the new policy won't work unless the central bank continues with the 14 percent rate. 

"An epic interest rate hike was implemented without calling it so. This won't work if the central bank continues with the 14 percent rate. They beat up the country by engaging in a fight with basic economics," Gürkaynak said. 

Economist Mahfi Eğilmez was another expert to deem Erdoğan's announcement "an indirect rate hike."