A woman holds Turkish lira banknotes in this photo illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration LICENSES RIGHTS
ANKARA, Aug 20 (Reuters) – Turkey’s central bank on Sunday began rolling back a growing and costly scheme protecting lira deposits from currency devaluation. This marks another step towards more orthodox policy after a shift towards rate hikes.
The central bank said in the early hours of Sunday that it had lifted banks’ targets for certain conversion levels of foreign exchange deposits into the lira protection scheme, known as KKM.
In contrast, the central bank now wants lenders to set a new target and convert KKM accounts into regular lira accounts by, among other things, discouraging companies and individuals from renewing KKM accounts.
According to a separate decree in the Official Gazette, the central bank also raised lenders’ reserve requirements for foreign exchange deposits, further pushing customers into regular lira accounts.
President Tayyip Erdogan’s government introduced the KKM program in late 2021 to stem a historic currency crash triggered by its unorthodox urge to lower interest rates amid rising inflation.
Since then, KKM accounts have grown to around $117 billion, or 3.1 trillion liras, which is about a quarter of total bank deposits. This has been fueled by a roughly 68% decline in the lira over the past two years.
To cover KKM’s devaluation costs, the central bank paid an estimated 300 billion lira ($11 billion) in June and July when the lira plummeted again. The cost of this month was estimated at 350 billion lira.
The lira has remained steady over the past month, closing last week at 27.02 per dollar, an all-time low.
After winning his re-election in May, Erdogan appointed a new finance minister and central bank governor to push for a policy reversal, including raising interest rates by 900 basis points on the trade deficit.
The central bank said the KKM move will “bolster macroeconomic financial stability by supporting lira deposits” and pledged more such moves.
For foreign exchange accounts with maturities of up to a month, the reserve requirement ratio has been raised from 25% to 29%, the Presidency Official Gazette said in a separate announcement overnight. Up to a year the rate is 25%.
Hakan Kara, a former central bank chief economist at Bilkent University, said the bank wanted to “kill two birds with one stone” by raising deposit rates while curbing KKM accounts. “Official interest rates could have been increased without getting involved in these complex matters,” he added.
($1 = 27.0687 liras)
Reporting by Ece Toksabay, Jonathan Spicer and Azra Ceylan. Edited by Deepa Babington and Frances Kerry
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