(Bloomberg) -- Turkey removed an interest rate cap on an emergency savings plan created to protect the lira, which has come under increasing pressure ahead of general elections in May. 

The savings plan — which promises a state-guaranteed return on lira deposits that matches or beats any decline against the dollar — was introduced during a currency crisis late 2021. 

Turkey Increases Pressure on Banks Over Key Lira Savings Tool

Turkish lenders are now free to set the rate on those FX-protected accounts, a presidential decree published in the Official Gazette on Friday said. Previously, banks were allowed to offer a maximum of three percentage points over the central bank’s weekly repo rate of 8.5%.

“The decision was taken to prevent the recent depreciation of the lira,” said Haluk Burumcekci, the founder of Burumcekci Research and Consulting in Istanbul.

The scheme became a key tool for the government to try to stabilize the lira, but the accounts faced a rapid outflow in January. Previously the central bank removed the interest rate limit on Turkish lira deposits that were converted from dollar deposits, resulting in renewed inflows. With the new measures, the interest rate limit was also lifted for accounts converted from lira and were supported by the Treasury, which may help the currency further.

The removal of all interest rate caps will mean a further increase in lira deposit rates, Akbank wrote in a research note. Average interest rates offered to lira deposits of up to three-months rose to a two-decade high of 28.1%, according to latest central bank data.  

The lira has ranked as the third-worst performing currency among emerging markets over the past month, following the Russian ruble and the Argentine peso.

Friday’s move came after the central bank told commercial lenders to encourage more customers to place their money in the scheme, and asked them to stop using loopholes that create new demand for dollars.

Turks have increased their holdings of foreign exchange by as much as $1.7 billion dollars over the past month, while inflows into the lira savings plan have remained stable over the same period.

Under the scheme, savers can open accounts with liras they already hold or with foreign currencies they convert to the Turkish currency. 

--With assistance from Beril Akman.

(Updates with graph and fifth, sixth paragraphs.)

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