Wednesday, February 24, 2021

Turkey tightens policy again by raising lira reserve ratio

     Turkey's central bank, which has already raised its key interest rates three times in the last six months, tightened its policy further by raising its reserve requirements for banks, saying the move aimed to improve the effectiveness of its transmission of monetary policy.
     The Central Bank of the Republic of Turkey (CBRT) raised the reserve requirement ratio for all Turkish lira deposits by 200 basis points and lowered the upper limit for how much foreign exchange banks can hold to 20 percent from 30 percent and the upper limit for gold to 15 percent from 20 percent.
     In addition, CRBT will raise its renumeration rate applied to bank's required reserves by 150 basis points to 13.50 percent.
     The changes are expected to increase lira-denominated reserves at the central bank by around 25 billion lira, while total required reserves in foreign exchange and gold are expected to decline by US$500 million if the reserve option utilization rate remains unchanged for remaining tranches, the bank said.
     Unlike most central banks, Turkey's central bank frequently uses reserve requirements as part of its box of monetary policy tools.
     The previous change came in November when CBRT not only raised its main interest rate but revised its reserve requirement regulation by scrapping a policy of linking the reserve requirement and renumeration with banks' loans so the same ratio was applied to all banks.
     According to its website, the ratio on lira demand deposits is now 8 percent, 6 percent on deposits of up to 6 months, 4 percent on deposits up to 1 year and 3 percent on 1 year or longer.
     The reserve ratio on foreign currency deposits ranges from 19 percent on demand deposits to 13 percent on deposits 1 year and longer, and for precious metals the ratio ranges from 22 percent for deposits on demand to 18 percent for deposits 1 year or longer.
     Turkey's central bank raised its policy interest rate by a total of 825 basis points from September through December to 17.0 percent and has pledged to maintain a tight monetary policy stance, and tighten further if needed, until inflation falls permanently.
     At the bank's last meeting on monetary policy on Feb. 18, the bank confirmed its commitment to tight monetary policy, saying the lagged effects of a fall in the lira's exchange rate and high inflation expectations were still having an adverse impact on prices.
     However, the central bank also noted that credit growth was starting to slow amid tighter financial conditions and the decelerating impact of the monetary tightening on credit and domestic demand was expected to become more significant.
     Earlier this month the central bank's governor, Naci Agbal, told Reuters that interest rates were unlikely to be cut for a long time this year given the pressures on inflation and he also wanted to rebuild the bank's depleted foreign exchange reserves.
     Despite a rebound in the lira's exchange rate in the last four months, Turkey's inflation rate shot up to 15 percent in January from 14.6 percent in December - three times the central bank's medium-term target of 5.0 percent inflation - due to higher prices of housing, fuels and food.
     In its latest inflation report from January, CBRT forecast inflation of 9.4 percent by the end of 2021 and then 7.0 percent by the end of 2022 before stabilizing around the 5 percent target in 2023.
     The combination of rate hikes and new economic leadership, including the arrival of Agbal in November last year has bolstered the confidence of investors.
     Last year the lira lost 30 percent of its value from the start of the year until early November when Turkey's strong-willed president, Tayyip Erdogan, installed Agbal at the central bank, followed by the resignation of Berat Albayrak, Erdogan's son-in-law, as finance minister.
     Since Nov. 8, when the lira hit a record low around 8.52 to the U.S. dollar, the lira has soared almost 19 percent - making it the world's top performer - to a rate of 7.17 today and is up 2.4 percent this year.
     After shrinking in the second quarter, Turkey's economy bounced back in the third quarter and grew an annual 6.7 percent from a fall of 9.9 percent. 
      Analysts estimate economic growth of up to 8.0 percent in the fourth quarter of 2020 for an annual expansion of 2.5 percent.

      The Central Bank of the Republic of Turkey issued the following statement:

"In line with its main objective of price stability, the Central Bank of the Republic of

 Turkey revised the reserve requirement regulation to improve the effectiveness of 

monetary transmission mechanism.

In the “Monetary and Exchange Rate Policy for 2021” text, it is stated that reserve requirement ratios will be used as an instrument to support the monetary stance and the monetary transmission mechanism in pursuit of the price stability objective within a plain framework.


  • Turkish lira reserve requirement ratios have been increased by 200 basis points for all liability types and maturity brackets.
  • The upper limit of the facility for holding FX has been decreased from 30% to 20% of Turkish lira reserve requirements.
  • The upper limit of the facility for holding standard gold has been decreased from 20% to 15% of Turkish lira reserve requirements.

As a result of these changes, TL-denominated required reserves are expected to increase by approximately TRY 25 billion, while total required reserves in FX and gold are expected to decrease by USD 0.5 billion, should the reserve option utilization rates remain unchanged for the remaining tranches.

In addition, the remuneration rate applied to TL-denominated required reserves has been increased by 150 basis points to 13.5%.

These changes will be effective from the calculation date of 19 February 2021 with the maintenance period starting on 5 March 2021."


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