Central bank abandons imposing an upper limit on currency-protected deposit accounts- a de facto interest rate hike

In a letter sent to banks, the Central Bank announced that it has abandoned imposing an interest rate upper limit on currency-protected deposit accounts – KKM. The move came as a reversal amidst rising hard currency demand given the government’s strong grip on Turkish lira ahead of the 2023 elections.

The limit was set as adding 300 basis points to the central bank’s policy rate at 9% in case the Turkish currency depreciated below the imposed limit. On the other hand, in the case TL’s depreciation exceeded the 12% limit, the government was obliged to pay for depreciation exceeding the 12%.

Now with the elimination of the interest rate limit from the KKM accounts which have started to decline recently, the government is aiming to make TL deposits attractive again over hard currency.

With the TL/dollar going broadly horizontal as per the government’s interventions since late summer months, in the recent months, the depositors have been fleeing the KKM accounts shifting to ordinary TL deposits that is offering 25-30% recently.

Hence the government’s decision to support the TL through the KKM without an interest rate limit is a de facto rate hike as the KKM interest rates will son be matching the normal TL deposit rates at around 25-30%.

Those who have been seeking real returns with CPI inflation at 64% and the policy rate at 9% have been investing  in Borsa Istanbul since last year at an increasing extent.  The recent decision to abandon the interest rate cap in KKM accounts could as well motive such fresh equity investors back to deposits. It might also slow down domestic consumption demand to some extent as higher interest rates do in every normal economy even though real return will still be negative.