As per the central bank announcement today, FX reserve requirement ratios have been increased by 300 basis points in all liability types and maturity brackets for all banks.
The bank rather wants to call the move”normalization” from COVID-19. Yet the truth is that with Turkey’s CPI inflation at 13% and the policy rate at 8.25%, the spike in the inflation rate in the recent months that have urged the bank to resume its aggressive rate cycle, must be worrying the policy makers.
The banks will have a hard time finding an additional $ 9.2 billion and invest it back into the CBT accounts. Thus, they will have to halt a part of swaps they make with CBT and / or exchange the currencies in the ROM with TL. In both cases, it will be necessary to give TL to the MB and receive foreign currency from there.
The banks will roughly give TL60 bn to the central bank which will be withdrawn from the TL market. Since the currencies they receive from CBT will return to the central bank, the operation will not negatively affect the bank’s gross fx reserves.
Through this operation the excessive loan growth could as well be slowed down and thus they aim to cap the spike on the inflation front.
From this week’s MPC meeting, as widely expected the CBT is more likely to remain on hold and keep the policy rate (1-week repo rate) at 8.25% in July due to a recent deterioration in inflation.
Below is the central bank announcement:
- Within the context of the measures announced on 17 March 2020to contain the adverse effects of the coronavirus (Covid-19) pandemic, FX reserve requirement ratios were reduced by 500 basis points for banks that met real credit growth conditions, and USD 5.1 billion of liquidity was released. Additionally, banks that met real credit growth conditions for the first time were provided with approximately USD 9.2 billion of liquidity, and thus, a total amount of USD 14.3 billion of liquidity was provided to the banking system.
- This time, as part of the normalization process, in order to support financial stability, the CBRT has decided to increase FX reserve requirement ratios by 300 basis points in all liability types and maturity brackets for all banks.
- As a result of this decision, approximately USD 9.2 billion of FX and gold liquidity is expected to be withdrawn from the market.
- The aforementioned change will take effect from the calculation date of 10 July 2020 with the maintenance period starting on 24 July 2020.