Ankara: Turkey is draining lira liquidity at a record pace and has made it more expensive for banks to offer a tool designed to support the currency, as the government tries to shift to more market-friendly policies.
The latter move was announced hours after the central bank raised interest rates by less than expected on Thursday, but pledged alternative measures to counter inflation running at almost 40 per cent.
Lenders will have to park more liras at the central bank to cover deposits under a program known in Turkey as KKM, according to an announcement in the Official Gazette published at midnight local time. The reserve requirement ratio will now be 15 per cent, up from zero for deposits of six months and longer. It remains 8 per cent for those up to three months.
The stricter rule may draw as many as 450 billion liras from the banking system.
It promises a state-guaranteed return on lira deposits that at least matches the currency’s declines against the dollar. Its introduction was criticized by many investors as adding to the labyrinth of market controls introduced under President Recep Tayyip Erdogan.
The central bank has separately withdrawn record amounts of money from the banking system this month to reduce lira liquidity. It was a net borrower of liras via open market transactions for a fourth straight day on Wednesday, according to data compiled by Bloomberg.
After raising its benchmark rate by 250 basis points to 17.5 per cent, the central bank said it would also introduce “quantitative tightening and selective credit tightening” to rein in excess lira liquidity in the market. The rate hike was smaller than what most economists expected, with some saying it was too little to support the lira and fight inflation.