Turkish central bank tightens again via lira reserves

ISTANBUL (Reuters) – Turkey’s central bank on Monday raised remuneration rates on required lira reserves by 200 basis points for all banks, taking a further backdoor tightening step that rolls back measures it had adopted to ease coronavirus fallout.

It is the latest effort to support the lira that touched another all-time low last week at nearly 8 versus the dollar, and comes after a surprise policy tightening last month. The bank on Friday also raised the lira swap rate.

The central bank said lenders that meet real loan growth requirements will have a 9% remuneration rate on lira required reserves, while the rate for others will be 2%. The new rates will be effective Oct. 16.

The bank also said it halved the commission rate on required reserves for forex deposits and participation funds. The rate now stands at 0.0125% for dollars and 0.00125% for other currencies.

The moves will improve financial stability and the monetary transmission mechanism, central bank sources said, adding that they will also decrease the banking system’s transaction costs.

The central bank has recently taken liquidity steps to normalise policy since restrictions related to the coronavirus pandemic were lifted.

Since restrictions related to the coronavirus pandemic were mostly lifted in June, the bank’s mostly backdoor steps have raised the average cost of funding CBTWACF= to 11.64% as of Friday. The policy interest rate was raised to 10.25% last month.

Such steps have raised expectations for another rate hike at next week’s monetary policy meeting, after the bank unexpectedly raised its policy rate by 200 basis points last month. The lira has hit a series of record lows against hard currencies since August.

The cost of funding is “still well below the new ceiling of 13.25%,” said Win Thin, of Brown Brothers Harriman. “Another outright rate hike is possible (on Oct. 22) if the lira continues to weaken.”

The lira has lost as much as 25% of its value this year, mainly on concerns over the central bank’s depleted forex reserves and costly interventions in the forex market.