Turkey central bank lifts lira by dumping another credit rule

ISTANBUL: Turkey's central bank scrapped a rule that had nudged banks to lend cheaply, lifting the lira on Friday with another step to simplify and tighten credit channels after hiking interest rates.

The central bank had previously linked reserve requirement ratios and remuneration rates to loan growth, which had spurred lending and economic growth.

But under new Governor Naci Agbal it raised its key rate by 475 points last week and has taken other steps to support the lira and cut inflation, which has been stuck near 12pc all year.

The same reserve requirement ratios and remuneration rates will now be applied to all banks, which the central bank said should make its monetary transmission mechanism more effective.

The lira, which touched an all-time low in early November, strengthened as much as 1pc against the dollar before slipping slightly to 7.82 by 0832 GMT.

Enver Erkan, economist at Tera Yatirim, said Turkish authorities were meeting market expectations by taking normalisation steps almost daily.

President Tayyip Erdogan sacked the former central bank governor earlier this month and appointed Agbal, who two weeks later hiked the policy rate to 15pc in the sharpest monetary tightening in more than two years.

The finance minister also resigned and Erdogan's more market-friendly rhetoric has stoked optimism among foreign investors that Turkey would embrace orthodox economic policies.

ROLL-BACK

In its financial stability report on Friday, the central bank said the rapid expansion in loans had supported economic recovery from the coronavirus crisis, although it kept prospects elevated for inflation and the trade deficit.

Agbal repeated in the report that the central bank's main focus was price stability. "Our tight monetary stance ... will help decrease current macrofinancial risks," he said.

Under the new rules, the required reserve ratio for lira deposits with a maturity of up to three months was set at 6pc. For foreign currencies, the ratio for deposits with a maturity of less than a year was set at 19pc.

The financial sector's required reserves are expected to increase by around 12.3 billion lira, and $5.7 billion in forex and gold, as a result of the revisions, the central bank said.

The revision in the remuneration and commission rates, set at 12pc and 0pc respectively, will lead to lower intermediation costs, the bank said.

The report noted that banks' non-performing loan ratio could rise depending on regulations that classify the loans and on the deceleration in loan growth.

It added that the current account deficit and deposit dollarisation had put pressure on exchange rates and the bank's own FX reserves, increasing risks to price stability. Net FX reserves have more than halved this year.