The Turkish central bank said on Wednesday it planned to end the foreign exchange-protected Turkish lira deposit scheme, the so-called KKM, next year as it continues to simplify the macroprudential framework.
The bank shared its “Monetary Policy for 2025” road map, covering key aspects of its policies and communication strategy for 2025.
The Central Bank of the Republic of Türkiye (CBRT) also announced it planned to convene eight times in total for its monetary policy committee (MPC) meetings throughout the year instead of having monthly meetings.
“As the disinflation process becomes more evident in 2025, demand for Turkish lira assets will continue. In view of the rise in the ratio of TL deposits and the fall in KKM accounts, the CBRT will continue to simplify the macroprudential framework and terminate the KKM scheme in 2025,” the CBRT said.
The bank covered the path of its policy framework in 2024 in detail, recalling the major steps taken within this year.
“In 2024, the CBRT continued to simplify the macroprudential policy framework to enhance the functionality of market mechanisms, strengthen macro-financial stability and support monetary transmission mechanism,” it said.
“The simplification process will continue in 2025 based on evaluations regarding the effects of the current macroprudential framework on inflation, interest rates, exchange rates, reserves, expectations and financial conditions,” it added.
The strategy for 2025 was shared before this year’s last meeting in which markets widely expect the CBRT to opt for easing its key rate after keeping it on hold since March.
The central bank lifted the key policy rate, the one-week repo rate by a total of 4,150 basis points between the summer of 2023 and March of this year to rein in price gains.
Annual inflation declined to 47.09% in November from an annual high of 75% in May, mainly due to tight monetary and fiscal policies. The central bank sees it ending 2024 at around 44%.
In its objectives for next year, the monetary authority pledged to continue to use “all available instruments” in line with achieving and maintaining price stability.
“The primary objective of the Central Bank of the Republic of Türkiye is to achieve and maintain price stability. All available instruments will continue to be decisively used in line with this objective. Financial stability will also be safeguarded as a supporting factor for price stability,” it said.
The one-week repo auction rate will continue to be the main policy tool of CBRT, it also said.
“The level of monetary tightness required for sustained price stability will be maintained as long as needed to attain the inflation path projected in the Inflation Reports and to achieve the 5% inflation target in the medium term.”
KKM exit
The authorities began to scale back the KKM scheme in August last year, following a general shift to more conventional macroeconomic policy and since then the volumes of these accounts have been declining.
The foreign exchange-protected deposit scheme, known as KKM was launched in late 2021 to help reverse dollarization and support the Turkish lira.
The central bank said on Wednesday that the KKM balance fell to $34.2 billion as of Dec. 20, 2024.
Meanwhile, it said, “The share of Turkish lira deposits within total deposits rose to 58.6%, and the share of KKM within total deposits fell to 6.2% as of Dec. 20, 2024.”
“The floating exchange rate regime will continue in 2025, and exchange rates will be determined under free market conditions according to the supply and demand balance,” the bank also noted.
Build-up strategy
Moreover, the bank highlighted that strengthening international reserves “is essential” for effective monetary policy and financial stability as it pledged to maintain its reserve build-up strategy.
“Owing to monetary tightening and the steps taken to simplify the macroprudential framework, international reserves recorded a strong upward trend,” said the CBRT.
It pointed out that gross reserves reached $163.5 billion as of Dec. 13.
“Meanwhile, net reserves excluding swaps rose by $87.2 billion to $50.1 billion over the period from the beginning of the year to Dec. 13, 2024,” it added.
“In this respect, as long as market conditions allow, the CBRT will maintain its reserve build-up strategy and ensure the continuation of the stable uptrend in international reserves in 2025.”
