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After ending a new round of aggressive interest rate hikes this month and completing a tightening cycle, Turkey on Tuesday amended regulations to stop savers from flocking to foreign currencies and ease pressure on the lira.
Turkey's central bank is raising the cost of hard currency deposits for commercial lenders while easing mandatory reserve requirements for some of the currency-linked accounts that are part of a **backed savings plan designed to prop up the lira.
Last week, Turkey's central bank raised its benchmark interest rate to 45% and completed its tightening cycle. It is understood that this round of interest rate hikes is the eighth consecutive rate hike by the central bank since entering the latest round of interest rate hike cycle in June 2023. Since then, the monetary authorities have been preparing to take more measures to encourage more savings in local currencies and ensure the pass-through of interest rates to the economy.
The lira has traded nearly 3% against the dollar so far this month, with little change in early trading Tuesday.
Prior to the latest measures, interest rates on lira fixed deposits had fallen, and with inflation set to accelerate by more than 70% in the coming months, this could prompt local savers to look for other avenues.
Turkey's central bank said on its ** that domestic lenders must now set aside more funds for foreign exchange-denominated deposits and participation**. In addition to the existing requirement for necessary reserves, the additional rate at which these accounts must be denominated in lira has been doubled to 8 per cent.
The monetary authority has also lowered the requirement for a maximum of six months of FX linked savings accounts, reducing its mandatory rate from 30% to 25%. Under this mechanism, lira depositors can hedge against currency losses and receive state-guaranteed compensation if the depreciation exceeds the interest on the account.
The impact of these measures will cancel each other out to some extent. QNBFINANSBansbank economists estimate that the net impact of these measures will lead to the withdrawal of excess liquidity from some systems.