Turkey holds rate for 3rd time, withdraws more liquidity

     In June the central bank then kept the rate steady, wrapping up a 9-time rate cutting spree begun in July 2019 that totaled 15.75 percentage points, and also left the rate steady in July, noting the economic recovery was gaining pace. 

      On July 18 CBRT then raised the reserve requirement on all foreign currency deposits, regardless of maturity, by 300 basis points in the first step toward rolling back some of the 500 point cut in requirements on March 17 at the height of the pandemic-induced financial shock.

      The July hike in the reserve ratio withdrew an estimated US$9.2 billion of FX and gold liquidity as part of total injection of US$14.3 billion to financial markets in March from the cut to reserve requirements and liquidity injections.

      Today CBRT said it would raise the FX reserve requirement for all maturities by another 200 basis points, completing the rollback of the March cut, and also raise the reserve requirement for precious metals deposit by 700 points.

      In addition, CBRT will raise the reserve requirement on Turkish lira deposits with maturities up to 6 months by 200 basis points and by 150 basis points for maturities of up to 3 years.

     ”Thus, with the revision made on 18 July 2020 and this current arrangement, USD17.7 billion of FX and gold liquidity, which has been injected  into the market since 17 March due to the reduction of FX reserve requirement ratios and the fulfillment of real credit growth conditions by some banks for the first time, will be full withdrawn as part of the normalization,” CBRT said.

      The hike in reserve requirements follows several moves by the central bank this month to tighten its policy stance without raising its key interest rate, something that would put the current governor on a collision course with Turkey’s president, Recep Tayyip Erdogan, who last year fired the previous governor for not lowering rates.

     On Aug. 11 CBRT reduced to zero the cheap liquidity it provides to primary dealers as part of its open market operations, days after it suspended one-week repo auctions, forcing lenders to meet funding needs through the overnight window at 9.75 percent.

      Turkey’s lira, which fell sharply to new record lows earlier this month, eased slightly in the wake of today’s decision to trade at 7.34 to the U.S. dollar but remains up from the record low of 7.39 that it hit earlier this week, but still down almost 19 percent since the start of this year.

     Although global economic activity has shown signs of a partial recovery in the third quarter of this year, the central bank said uncertainty remains high and both advanced and emerging economies are maintain expansionary monetary and fiscal stances.

     While commercial loans have started to normalize, consumer loans remain strong, tourism revenues have partially improved due to an easing of travel restrictions, while a recovery of exports, low commodity prices and the exchange rate will support the current account balance, CBRT said.

     Core inflation is starting to trend higher due to a rise in pandemic-related costs and changes in the exchange rate and credit is now retaining disinflationary effects from the demand side while there are still significant uncertainties about domestic and external demand, it added in explaining its decision to keep the policy rate unchanged.

     As in recent months, the central bank said “keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance” and underlying inflation will determine the future stance.

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

Participating Committee Members

Murat Uysal (Governor), Murat Çetinkaya, Ömer Duman, Uğur Namık Küçük, Oğuzhan Özbaş, Emrah Şener, Abdullah Yavaş.

The Monetary Policy Committee (the Committee) has decided to keep the policy rate (one-week repo auction rate) constant at 8.25 percent.

While global economic activity has shown signs of partial recovery in the third quarter following the normalization steps taken by several countries, uncertainties on global economic recovery remain high. Advanced and emerging economies continue to maintain expansionary monetary and fiscal stances. The pandemic disease is closely monitored for its evolving global impact on capital flows, financial conditions, international trade and commodity prices.

Economic recovery, which started in May following gradual steps towards normalization, is gaining pace. Recent monetary and fiscal measures that aim to contain negative effects of the pandemic on the Turkish economy contributed to financial stability and economic recovery by supporting the potential output of the economy. While commercial loans have recently started to normalize, consumer loans have remained strong. The recent upturn in imports, which has resulted from deferred demand as well as pandemic-related liquidity and credit policies, is expected to moderate with the phasing out of these policy measures. Although tourism revenues declined due to the pandemic, easing of travel restrictions has started to contribute to a partial improvement. The recovery in exports of goods, relatively low levels of commodity prices and the level of the real exchange rate will support the current account balance in the upcoming periods.

Along with the pandemic-related rise in unit costs, exchange rate and credit developments restrain the demand-side disinflationary effects, and the trends of core inflation indicators have increased. As the normalization process continues, supply-side factors, which have prevailed recently due to pandemic-related restrictions, will phase out. The gradual normalization of pandemic-specific financial measures and recent tightening steps taken in liquidity management are judged to support macrofinancial stability. However, depending on the course of the pandemic, uncertainties regarding domestic and external demand conditions remain significant. Accordingly, the Committee decided to keep the policy rate unchanged, while continuing with liquidity measures.

The Committee assesses that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, monetary stance will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.

It should be emphasized that any new data or information may lead the Committee to revise its stance.

The summary of the Monetary Policy Committee Meeting will be released within five working days.”

TL and FX reserve requirement ratios have been raised for banks fulfilling real credit growth conditions.

As part of the normalization process, in its press release of 18 July 2020, the CBRT announced that it increased FX reserve requirement ratios by 300 basis points in all liability types and maturity brackets for all banks. Now, the CBRT has decided to raise FX reserve requirement ratios for banks fulfilling real credit growth conditions by 700 basis points for precious metal deposit accounts and by 200 basis points for all other FX liabilities for all maturity brackets.

Moreover, in line with the recent steps taken towards the Turkish lira liquidity management, for banks fulfilling the real credit growth conditions: TL reserve requirement ratios have been increased by 200 basis points for all deposits / participation funds liabilities with a maturity up to 6 months and other liabilities with a maturity up to 1 year, and by 150 basis points for other liabilities with a maturity up to 3 years.

As a result of this decision, approximately TRY 17 billion and USD 8.5 billion of FX and gold liquidity is expected to be withdrawn from the market.

Thus, with the revision made on 18 July 2020 and this current arrangement, USD 17.7 billion of FX and gold liquidity, which has been injected into the market since 17 March 2020 due to the reduction of FX reserve requirement ratios and the fulfilment of real credit growth conditions by some banks for the first time, will be fully withdrawn as part of the normalization.

These changes will be effective from the calculation date of 21 August 2020 with the maintenance period starting on 4 September 2020.”

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