Turkish central bank tightens screws on cheap lira window abroad

Turkey’s central bank raised the reserve requirement ratios on banks’ short term liabilities abroad in a bid to discourage local banks from seeking cheap lira from offshore markets.

The bank early Saturday raised the reserve requirement ratio to 18% for maturities as long as 1 month in lira-denominated funds from repo transactions and loans obtained from abroad, and to 14% for maturities as long as 3 months. Previously, the reserve requirement ratio was 12% for maturities of as long as 1 year for repo transactions and loans abroad.

Turkish banks can use offshore repo transactions and loans to access lower-cost lira funds abroad. 

After central bank Governor Fatih Karahan struck a hawkish tone on Thursday in his quarterly presentation on inflation, the Turkish lira’s forward implied yield for the next day fell sharply, signaling ample lira liquidity in offshore markets. The central bank’s policy rate is 46%, while it frequently used its overnight lending window at 49% in May.

The central bank doesn’t want interest rates to fall through any channel, such as when banks obtain cheap loans in offshore markets, and is making moves that demonstrate its tight stance at every opportunity, said Alp Serbetli, a director at ICBC Turkey Yatirim. 

The monetary authority can sometimes make liquidity adjustments to ensure that its interest rates are smoothly reflected in the banking system. The bank also held a lira deposit auction of 50 billion liras ($1.28 billion) on Friday to rebalance liquidity in domestic markets.

The central bank on Thursday maintained its year-end inflation forecast of 24%, with Karahan pledging to do “whatever is needed” to tame price pressures. “The risk toward inflation remains to the upside,” he added.

An almost year-long slowdown in Turkey’s inflation appeared to stall in April, with the latest data showing an increase of 37.9% year on year.