Turkish central bank removes interest threshold

Turkish central bank removes interest threshold
Date: 26.9.2023 11:00

Turkey’s central bank removed the minimum interest rate in FX-protected deposits which became extremely costly for the Turkish economy even though it had aimed to safeguard lira deposits from foreign exchange depreciation.

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Turkey’s central bank on Sept. 25 announced that it removed minimum interest rates in FX-protected deposits; hence, the banks are able to pay interest below the policy rate. Previously, they were equal to the policy rate.
The country’s previous economic administration implemented an unorthodox policy of lowering policy rates, and it failed to control raging inflation and foreign exchange rates. As a solution, the government created the FX-protected deposit scheme covering the interest and exchange rate difference from the central budget.
Turkey's central bank on Aug. 20 began rolling back this growing and costly scheme, marking another move toward more orthodox policies following a shift toward interest rate hikes.
With this recent move, the lira deposits would be more desirable compared to FX-protected deposits. Also, the banks began to convert previous FX-deposit accounts to regular lira deposits in the last month.
As the new Central Bank governance have implemented several hikes in policy rates in the past several months, the interest rate of the FX-protected deposits were increasing as well. 
The FX-protected accounts have ballooned to some $117 billion, or 3.1 trillion lira, around a quarter of total bank deposits. This has been stoked by a roughly 68% fall in the lira in the last two years.
To cover KKM depreciation costs, the central bank paid an estimated 300 billion lira ($11 billion) in June and July, when the lira plunged again.


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