KKM Ends, Gold Volatility, and the Fate of the Turkish Lira

Turkey‘s currency market is going through a significant turning point. After years of relying on highly unconventional measures to stabilize the lira, policymakers are now gradually withdrawing direct exchange-rate protection mechanisms. As a result, the long-standing tension between the lira and inflation has become more visible, while households’ demand for hedging tools continues to rise. Against this backdrop, sharp fluctuations in global precious-metal prices this week have further heightened market sensitivity.

A Major Policy Shift: The KKM Mechanism and Its End

In late 2021, Turkey introduced one of its most controversial — yet at the time widely regarded as “necessary” — policy tools: the FX-Protected Deposit Scheme, commonly known as KKM. The core idea was simple but powerful. Lira deposits were linked to foreign-exchange movements: households and companies could place funds in lira-denominated KKM accounts, and if the lira depreciated against the U.S. dollar or the euro during the deposit period, the loss would be compensated by the Treasury or the central bank. If the lira did not depreciate, depositors would receive only the regular interest income. In effect, KKM offered an implicit form of exchange-rate insurance for holding lira.

At a time of rapid currency depreciation and accelerating dollarization, KKM did succeed in stabilizing the situation in the short run. Funds that might otherwise have flowed into foreign currency or cash were redirected back into the banking system. The share of lira deposits temporarily recovered, and FX demand was partially suppressed. From a policy perspective, KKM helped prevent a disorderly collapse of the lira and bought the government valuable time.

However, the costs of the mechanism became increasingly evident. As the long-term depreciation trend of the lira remained intact, the fiscal and monetary burden of KKM grew steadily. Compensating exchange-rate losses meant that the public sector absorbed risks that would normally be borne by the market. At its peak, KKM balances approached USD 140 billion, turning the scheme into a concentrated and opaque liability within Turkeys financial system. As policy rates were gradually raised and inflation pressures persisted, KKM lost much of its appeal, and balances began to contract rapidly from 2024 onward.

The policy direction eventually became clear. In August 2025, Turkish authorities announced the suspension of new KKM accounts and renewals. Existing accounts would be honored until maturity but would no longer roll over. This moment is widely seen as the formal institutional end of KKM. Symbolically, it marked the governments decision to stop providing direct exchange-rate protection through fiscal and central-bank balance sheets, allowing the lira to be priced more by market supply, demand, and interest-rate conditions.

The exit from KKM removed one of the most important shock absorbers supporting the lira over recent years. In the short term, this has increased uncertainty around FX demand and exchange-rate volatility. In the longer run, however, it also signals a gradual shift away from administratively driven tools toward a framework that relies more heavily on market pricing and policy credibility.

Foreign Exchange and Inflation: The Accumulation of Structural Imbalances

To understand Turkeys current FX and inflation dynamics, it is essential to look at the structural problems that have accumulated over many years. The depreciation of the lira and the surge in inflation were not the result of a single shock, but rather the outcome of prolonged policy choices, external vulnerabilities, and institutional constraints.

During the 2010s, Turkey experienced rapid growth fueled by capital inflows, credit expansion, and fiscal stimulus. This growth model, however, came with persistent current-account deficits and rising external debt. After 2018, the lira entered a phase of sustained depreciation, driven in part by periods in which the central bank refrained from implementing orthodox tightening measures. Political interference in monetary policy became increasingly visible. President Erdoğan repeatedly criticized rate hikes, famously arguing that “high interest rates are the cause, not the result, of inflation.” This stance ran counter to mainstream economic thinking and eroded confidence in central-bank independence, amplifying both inflationary and FX pressures.

The data clearly reflect these dynamics. In early 2022, Turkeys annual CPI inflation surged to nearly 80%, one of the most severe inflation episodes among OECD economies. The drivers were familiar: currency depreciation raised import prices, higher energy costs spread through the economy, and wages and rents adjusted upward amid entrenched inflation expectations. Together, these factors formed a self-reinforcing inflation spiral.

Only in recent years did the central bank pivot back toward more conventional tightening, sharply raising policy rates and tightening financial conditions to rein in inflation expectations. This shift helped bring inflation down from its peak, keeping it elevated but temporarily more contained. Still, the adjustment remains fragile. Policy lags, rigidities in labor and services prices, and structural constraints mean inflation risks have not disappeared.

The termination of KKM reinforces this transition toward a more market-based monetary framework. At the same time, it implies that exchange-rate volatility and the structure of FX demand may continue to evolve in the near term.

Household Hedging Under Inflation: The Rise of Gold and Crypto Assets

Against the backdrop of chronic currency depreciation and high inflation, Turkish households and investors have gradually developed their own strategies to protect purchasing power.

Gold has long been the most trusted store of value in Turkey. This preference reflects not only cultural habits but also the metals historical role as a hedge against inflation. By the end of 2025, Turkish households were estimated to hold roughly USD 500 billion worth of physical gold outside the banking system. For many families, gold reserves represent both accumulated wealth and a practical shield against currency erosion.

In the digital era, cryptocurrencies have emerged as an additional hedging channel. Multiple surveys and market indicators suggest that a substantial share of Turkeys adult population holds some form of crypto asset, with stablecoins — particularly USDT — playing a central role. While estimates vary across sources, a commonly cited figure suggests that around one-third of adults hold USDT or similar dollar-pegged stablecoins, primarily to hedge against lira depreciation and maintain exposure to dollar-linked value. The popularity of stablecoins also reflects declining confidence in traditional savings instruments and the demand for liquidity through digital channels.

Taken together, gold and crypto assets in Turkey function less as speculative tools and more as practical alternatives for hedging inflation and FX risk.

The Impact of This Week‘s Gold and Silver Sell-Off on Turkey

Global precious-metal markets saw a sharp correction this week, with gold and silver falling significantly from recent highs. For an economy like Turkey’s — where demand for precious metals is structurally high and inflation risks remain elevated — such price moves carry broader implications.

First, gold prices directly affect household sentiment and perceived wealth. Because a large portion of household savings is held in gold, falling prices translate into a decline in balance-sheet value, potentially weighing on consumer confidence and domestic demand.

Second, Turkey is heavily dependent on gold imports. Historically, rising gold prices have increased demand for foreign currency, as imports are settled in dollars. Conversely, falling prices can reduce FX demand and may offer short-term relief for the lira. However, if precious-metal prices fall alongside a stronger U.S. dollar, the net effect can reverse: dollar assets may become more attractive, intensifying depreciation pressure on the lira.

Turnleaf‘s inflation analysis highlights another important mechanism. In Turkey’s inflation transmission process, the wealth effect from household gold holdings has often diluted the impact of monetary tightening. When gold prices rise, households feel wealthier, sustaining consumption and price pressures. When gold prices fall, the opposite effect emerges, dampening spending and reshaping asset allocation decisions.

This dual dynamic means that the sharp decline in gold and silver prices this week is not merely a market event. It feeds directly into Turkeys inflation outlook and exchange-rate feedback loop.

Conclusion: Policy Transition and the Future of Turkeys FX Market

Turkey now stands at a critical economic juncture. Policymakers are attempting to move away from unconventional tools such as KKM toward a more market-oriented monetary framework, relying on interest rates and supply-demand dynamics to address inflation and currency pressures. The end of KKM represents a decisive step in that transition, but it also implies greater short-term volatility for the lira.

At the same time, years of high inflation and currency depreciation have fundamentally reshaped household behavior. Gold, stablecoins, and other alternative assets have become practical hedging instruments rather than fringe choices. This bottom-up adjustment reflects the persistence of FX risk and underscores the difficulty policymakers face in rebuilding confidence.

The sharp swings in precious-metal prices this week serve as a reminder that, in an economy shaped by inflation, debt, and external vulnerability, global market dynamics can influence Turkeys currency and FX market more directly — and more rapidly — than headline indicators alone suggest.

Looking ahead, Turkeys FX industry and monetary policy framework are likely to enter a phase that is more market-driven, more volatile, but also more transparent. Policymakers, investors, and households alike will need to adapt to this new environment.