Turkish lira makes rare gains on 'indirect' rate hike

Turkey's troubled lira on Monday pared back some of its historic losses after President Recep Tayyip Erdogan announced new currency support measures that analysts interpreted as an indirect interest rate hike.

Erdogan pushed the central bank to sharply lower borrowing costs despite the annual rate of inflation soaring to more than 20 percent.

The powerful Turkish leader appeared to double down on that approach over the weekend by affirming that his Islamic faith prevented him from supporting rate hikes.

"As a Muslim, I will continue doing what our religion tells us," he said in televised remarks.

Islamic teachings forbid Muslims from receiving or charging interest on loaned or borrowed money.

High interest rates are a drag on activity and slow down economic growth. Central banks raise their policy rates out of necessity when inflation gets out of hand.

Yet analysts said Erdogan bowed to market pressure and raised interest rates by stealth when he announced a complex series of measures Monday aimed at boosting the lira.

They include a new debt instrument that compensates the value of Turks' bank deposits that they lose due to the lira's depreciation.

Erdogan did not explain how this instrument would work.

But former Turkish treasury adviser Mahfi Egilmez called it an "indirect interest rate hike."

"If the exchange rate increases by 40 percent, and the interest rate increases by 14 percent, 26 percentage points will be paid in compensation," the economist wrote on Twitter.

The lira reversed a 10 percent loss Monday into a 10 percent gain after Erdogan's announcement.

The Turkish currency still lost a third of its value against the dollar since the start of November.