Turkey tweaks banks’ reserve requirements in bid to keep loan growth in check

Central bank also raised requirements for personal accounts at lenders that did not meet the target of converting foreign currency-denominated accounts into lira

A commercial street in Istanbul. Deepening trade imbalances and the world’s most negative borrowing costs when adjusted for prices have made the Turkish economy increasingly vulnerable. AP

Turkey’s central bank revised some reserve requirement rules for banks in an effort to keep loan growth in check and encourage conversion of foreign exchange into the local currency.

The monetary authority said banks’ local currency-denominated commercial cash lending – excluding that which involves small and medium-sized 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 shall be subject to a reserve requirement of 10 per cent, the central bank said.

It also raised reserve requirements for personal accounts at lenders that did not meet the target of converting foreign currency-denominated accounts into lira. The monetary authority increased the ratio for foreign currency deposits by 500 basis points for banks with a conversion rate below 5 per cent, and 300 basis points for those with a rate of between 5 per cent and 10 per cent.

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

The revision of reserve requirements came after the central bank kept its benchmark rate at 14 per cent for a fourth straight month despite inflation exceeding 60 per cent. Rather than adding to Turkey’s rate buffer, authorities are leaning more heavily on other policies that could bring in more hard currency and boost the central bank’s reserves.

Deepening trade imbalances and the world’s most negative borrowing costs when adjusted for prices have made 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 it is weighing the prospect of growth in long-term investment loans against the need to keep the current-account in check.

“In this context, the committee decided to strengthen the macroprudential policy set,” the bank said, signalling a possible move on reserve requirements.

Opting for unorthodox policies has limited the central bank’s coffers though so far this year. The nation’s gross reserves excluding gold holdings stood at about $69bn in the week ending April 15, down about 5 per cent from the end of 2021.