Turkey adjusts bank reserve requirements to control loan growth

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Turkey’s central bank has revised some reserve requirement rules for banks to control loan growth and encourage the conversion of foreign currency into local currency.

The monetary authority said commercial cash loans denominated in local currency from banks – excluding those relating to small and medium enterprises and export and agricultural loans – will be subject to reserve requirements.

Commercial loans that have been extended in four-week periods since April 1 will be subject to a 10% reserve requirement, the central bank said.

It also raised the reserve requirement for personal accounts with lenders that did not meet the target of converting accounts denominated in foreign currencies into liras. The monetary authority raised the ratio of foreign currency deposits by 500 basis points for banks with a conversion rate below 5% and by 300 basis points for those with a rate between 5% and 10%.

The changes will take effect from the calculation date of May 27, with the maintenance period starting on June 10, it said.

The revision to reserve requirements came after the central bank kept its benchmark rate at 14% for a fourth consecutive month despite inflation above 60%. Rather than increasing Turkey’s rate cushion, the authorities are relying more on other policies that could bring in more hard currency and increase central bank reserves.

Widening trade imbalances and the world’s most negative borrowing costs when adjusted for prices have left the $800 billion economy increasingly vulnerable at a time of intensifying global tightening led by the US Federal Reserve.

The Monetary Policy Committee said in its April rate decision text that it was weighing the prospect of growth in long-term investment lending against the need to control the current account.

“In this context, the committee decided to strengthen the set of macroprudential policies,” the bank said, noting a possible change in reserve requirements.

Unorthodox policy choice has limited central bank coffers so far this year. The country’s gross reserves excluding gold holdings stood at about $69 billion in the week ending April 15, down about 5% from the end of 2021.

Updated: April 23, 2022, 10:00 a.m.

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