Turkey Plans to Reduce Currency Protection Scheme as Lira Stabilizes

Turkey's central bank has announced plans to roll back its currency protection scheme for bank deposits in an effort to further normalize monetary policy.

The lira protection scheme, known as KKM, allowed Turkish customers to deposit their foreign exchange in foreign currency or Turkish lira accounts that would be protected from depreciation. However, it has grown massively in recent years as the lira plunged, costing the central bank an estimated $11 billion in the first half of 2022 alone to cover depreciation costs.

Now, with the lira stabilizing after aggressive interest rate hikes, the central bank says it will encourage banks to transition KKM accounts into regular lira accounts. It has lifted targets for converting foreign exchange deposits into the KKM scheme and instead wants banks to set goals to reduce KKM accounts by dissuading renewals.

Alongside these moves, the central bank raised reserve requirements on short-term foreign exchange deposits to further nudge customers toward regular lira accounts.

The decision marks another step by Turkey's new economic leadership to renormalize monetary policy following last year's unconventional interest rate cuts that damaged the lira. Reducing the size and costs of the KKM scheme will support macroeconomic stability as policy continues to prioritize lowering inflation.

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