Increased Reserve Requirements: Central Bank Augments Two Ratio Levels
ANKARA — Adjustments to Turkish Lira-denominated Funding Reserve Requirements
The Central Bank of Turkey has made significant modifications to the reserve requirement ratios for short-term Turkish Lira-denominated funding obtained from foreign sources. The adjustments aim to reinforce macro-financial stability and enhance the monetary transmission mechanism.
In the revised framework, the reserve requirement ratio for lira-denominated funds with maturities up to one month has been increased to 18%, while the ratio for maturities up to three months is now set at 14%. Previously, the reserve requirement ratio for maturities up to one year stood at 12% for these types of funds.
The central bank issued a statement, explaining that the differentiation of requirements across maturities and loans obtained from abroad would contribute to macro-financial stability and better control of the monetary transmission mechanism.
These changes follow an earlier decision this month, where the bank raised the reserve requirement ratios for foreign exchange (FX) deposits by 200 basis points across all maturities and set the minimum share of export proceeds to be sold to the bank at 35 percent until July 31. Moreover, the remuneration rate applied to required reserves maintained for lira deposits was raised from 84% to 86% of the bank's weighted average funding cost.
In a presentation of the bank's inflation report on May 22, Governor Fatih Karahan stated that these measures would aid in strengthening the monetary transmission mechanism and mitigate risks to the central bank's balance sheet. Furthermore, Karahan added that consumer loans should follow a course that supports the rebalancing in domestic demand, and lira commercial loan growth is in line with monthly growth limits and loan demand.
By increasing reserve requirements for short-term lira-denominated funding, the central bank seeks to minimize the risk of excessive reliance on volatile external funding sources and impede sudden capital outflows, thereby stabilizing the Turkish lira. Moreover, the adjustments will give the central bank greater control over domestic liquidity and credit conditions, enabling a more precise influence on banks’ funding costs and lending behavior.
In summary, the recent reserve requirement hikes are designed to enhance the resilience of Turkey’s financial system, tighten liquidity conditions, and bolster the effectiveness of monetary policy transmission.
The Central Bank of Turkey's adjustments to the reserve requirements for short-term Turkish Lira-denominated funding from foreign sources is part of a strategy to strengthen macro-financial stability and enhance the monetary transmission mechanism. These adjustments, aimed at minimizing the risk of excessive reliance on volatile external funding sources, will give the bank greater control over domestic liquidity and credit conditions.
By implementing these changes in the banking and finance industry, the central bank will be able to better control the monetary transmission mechanism, thus contributing to a more stable Turkish Lira and a more resilient Turkish financial system.
