The Turkish central bank plans to end the forex-protected lira deposits (KKM) scheme in 2025 after its balance fell to $34.2 billion as of December 20 2024. It also hinted that all restrictions on FX market may be lifted, that is instead of the current dirty peg which keeps TL artificially overvalued to suppress inflation will be ditched in favor of a true free float.
The share of Turkish lira deposits within total deposits rose to 58.6 percent, and the share of KKM within total deposits fell to 6.2 percent, the central bank said in its 2025 monetary policy report. However, the rest are still in FX deposits, attesting to the durability of the dollarization habit Amon savers. The FX protected scheme was criticized as a ticking time bomb, because savers suddenly demanding FX will have exhausted Central Bank’s meagre FX reserves. As of the third week of December CBT holds $155 bn in FX reserves, which mitigates this disaster scenario. On the other hand, Turks invested roughly $30 in O/N indexed money market funds, which could immediately be converted to FX if there is an economic shock, or political crisis.
The one-week repo rate will continue to be the main policy tool, with the bank maintaining monetary tightness for sustained price stability and achieving a 5 percent medium-term inflation target.
The floating exchange rate regime will continue in 2025, with exchange rates determined under free market conditions based on supply and demand balance.
The central bank did not commit to any exchange rate level and will not conduct FX buying or selling transactions to determine the level or direction of exchange rates.
It remains to be see whether restrictions on swap transactions, which limit short-term foreign financial investment uses for carry trade.
The central bank plans to hold eight monetary policy committee meetings in 2025 instead of monthly meetings. It will also publish its financial stability report biannually, maintaining it as a key communication tool.
The move is interpreted by analyst as an attempt to minimize political pressure to cut rates and to gain time to assess the impact of the traditional turn-of-the year wage, pension and salary hikes on inflation trends.
Its exit strategy from an overvalued TL is to leverage summer hard currency inflows brought about by tourism revenues to transition to a free float, which would presumably not lead a sudden depreciation of the Lira.
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