Turkey’s currency dropped after the country’s finance minister unveiled a round of tax cuts that sparked doubt over the government’s pledge to take a more disciplined fiscal approach.
Berat Albayrak, who is the Turkish president’s son-in-law, said on Wednesday that the country plans on enacting a slate of tax reductions and will extend other tax discounts, according to local media.
The fiscal stimulus measures come at a fraught moment for Turkey’s economy. A collapse this year in the value of the lira has sent inflation surging to nearly 25 per cent. The central bank reluctantly responded with a sharp rate increase, aimed at bringing price growth closer to its objective of 5 per cent.
However, a reduction in taxes raises concerns over how serious the government of Recep Tayyip Erdogan is in its vow to try to balance the economy. Mr Albayrak had said in September that the government would take a more disciplined fiscal approach, with spending cuts and plans for increased revenue.
“What happened to his promise of fiscal prudence?” asked Timothy Ash of fund house BlueBay.
The news sent the US dollar rallying as much as 2.9 per cent against the lira, the largest rise since August, during a time of acute volatility.
“Such a reaction implies that the market could be concerned that the central bank may not be sufficiently supported by the administration in its efforts to rein in inflation,” said Piotr Matys, a currencies strategist at Rabobank.
He added that the timing of the announcement, hours after the central bank revised its forecasts to show it expects inflation to remain above its goal until 2020, was “unfortunate.”
At TL5.59 to the dollar, the currency is still far off of its August peak of TL7.2149 but the sharp move highlights investor sensitivity to fiscal policy.
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