Turkey’s Central Bank Tightens Liquidity to Boost Lira, Ease Rate Impact
Turkey’s central bank announced a surprise move Friday to increase reserve requirements for some lira deposits, aiming to curb excess liquidity and enhance the effectiveness of its monetary policy, Bloomberg reports.
The move is seen as a significant step to shore up the struggling Turkish lira and improve the bank’s control over interest rates.
The bank raised the reserve requirement ratio for short-term lira deposits to 17%, up from 15%. Simultaneously, it reduced the reserve requirement for banks’ foreign-exchange liabilities denominated in lira to 4% from 5%.
Economists estimate these measures will drain around 100 billion Turkish lira from the interbank market. Okan Ertem, a senior economist at Turk Ekonomi Bankasi in Istanbul, noted that excess daily liquidity stood at around 638 billion lira on Thursday. This excess liquidity, according to Ertem, often undermines the central bank’s ability to influence short-term market rates. By reducing this surplus, the bank hopes to strengthen the impact of its interest rate decisions on lira deposits, overall demand, and lira volatility.
In a separate action, the central bank eased some restrictions on foreign-exchange linked deposit accounts, allowing banks more flexibility in managing consumer and business savings held in these accounts. This suggests a balancing act by the central bank, aiming to tighten liquidity while also addressing potential concerns about the impact of stricter regulations on the banking sector.
