Turkey has taken a significant step in its efforts to curb the use of foreign exchange measures designed to halt the depreciation of the lira. In a move aimed at weaning Turks off a scheme known as KKM accounts, banks will now be required to increase their holdings of government bonds if they fail to persuade their clients to shift to regular lira deposits.
The KKM scheme, which was introduced to counter the slide in the lira against the dollar last year, offers attractive interest rates on lira deposits. The returns on these deposits increase as the lira depreciates, rather than holding foreign currencies, which are more stable. Although the KKM accounts managed to slow down the decline in the lira, it has still plunged by 31% this year, making it the second-worst performing emerging market currency.
The new rule aims to strengthen macro financial stability by promoting regular lira time deposits. Banks whose clients do not convert a certain percentage of their KKM deposits to regular lira accounts will be required to purchase additional government bonds. The target set for the banks is a conversion rate of at least 50% for regular lira accounts and 5% for conversions from foreign currencies.
Currently, KKM accounts total around 3.4 trillion liras ($125 billion), making up more than 28% of all bank deposits. While the new rules incentivize banks to encourage clients to move away from KKM accounts, they do not eliminate them entirely.
The move by the Turkish government follows a shift in President Recep Tayyip Erdogan's stance on inflation and interest rates after winning a crucial election in May. The appointment of a new finance minister and central bank governor has led to a more orthodox approach, including a recent interest rate hike. The benchmark rate is expected to rise again on August 24.
The new rules on KKM accounts are likely to increase lira deposit rates and could contribute to further lira depreciation, which could fuel inflation. However, the impact on the stock market is not expected to be significant. Bond yields may experience a short-term decline.
While the Turkish economy faces inflationary pressures and a depreciating currency, efforts are being made to promote stability and steer away from unconventional measures. The implementation of these new rules on KKM accounts is a step towards achieving that goal.