Turkish Central Bank Moves to Drain Excess Lira Liquidity

Turkey’s central bank raised the amount commercial lenders need to set aside as reserves for short- and long-term lira deposits as part of efforts to help mop up excess liquidity in the system.

The reserve requirement ratio for short-term lira deposits will rise to 15% from 12%، and will increase to 10% from 8% for long-term lira deposits، the central bank said in a statement early Saturday. The reserve requirement ratio for foreign currency deposits that can be kept as lira was cut to 5% from 8%.

The central bank also raised the maximum commission rate applied، based on the level of the transition-to-lira rate، to 8% from 5%. In addition، the remuneration of required reserves that should be maintained for lira deposits will no longer be conditional on the transition-to-lira rate، according to the statement.

Supporting macrofinancial stability

The steps were taken “to support macrofinancial stability and the monetary transmission mechanism،” the central bank said.

The central bank signaled it would use so-called sterilization tools to manage lira oversupply in its Monetary Policy Committee statement on Thursday، after leaving rates on hold at 50% for a sixth month.

Data compiled by Bloomberg show the central bank’s net funding to lenders was a negative 394.9 billion liras ($11.6 billion) on Friday، the lowest since May 23. Negative net funding means the central bank has become a borrower of liras from banks، and usually occurs when there’s abundant or excess lira liquidity in the market.

The liquidity build-up complicates the central bank’s efforts to keep financial conditions tight، and could weaken the effectiveness of its current monetary policy by dragging down deposit rates، which is the opposite of what officials want to achieve.

Turkish authorities hiked the policy rate to 50% from 8.5% between June 2023 and March 2024، spurring demand for lira assets. That — and increasing foreign investor demand — resulted in abundant or excess lira liquidity in the market، leading the central bank to step up measures to mop up unwanted supplies.

“With the reserve requirement change، some liquidity will be drained from the system but it appears like the negative impact of that on banks will be balanced by the expansion of scope for interest payments،” said Cagdas Dogan، a research director at Istanbul-based Tera Yatirim. “The rise in maximum commission rate also aims to encourage transition to lira deposits،” he said.

Separately on Friday، Turkey’s banking watchdog BDDK، removed additional risk weights of some loans used in calculation of lenders’ capital adequacy ratios