Interest rate corridor width to be narrowed

The Central Bank of the Republic of Turkey (CBRT) announced on Tuesday its road map for the interest rate corridor during the normalization of global monetary policies. According to the bank, the interest rate corridor will be made more symmetric around the one-week repo rate and the width of the corridor will be narrowed. Before normalization, the funding provided to primary dealers via repo transactions will be added to their limit of one-week repo auctions without changing the funding cost of primary dealers from the CBRT. Thus, quotations on the interest rate on borrowing facilities provided for primary dealers via repo transactions will be terminated.

The CBRT underscored that flexibility of foreign exchange market (FX) selling auctions will be increased to reduce the exchange rate volatility. FX liquidity will be provided to the financial system through increases in the remuneration rate of Turkish lira-required reserves or adjustments of the Reserve Options Coefficients (ROC). Before normalization, borrowing limits via foreign exchange deposit accounts will be increased. After the related changes, the size of the FX liquidity that the financial system can be accessed from the CBRT, which is the sum of FX holdings in ROM and limits of the foreign exchange deposit market, will be considerably above the external debt payments of the banks in the coming year.

The bank also stressed the measures being taken to support financial stability. Before normalization, FX required that reserve ratios for the new FX noncore liabilities of the banks will be determined to incentivize maturities of longer than three years without increasing the costs on the stock of liabilities. Before and during normalization, to support Turkish lira core liabilities, if seen necessary by the CBRT, the remuneration rate of Turkish lira-required reserves will be revised in the coming period to reduce the intermediation cost of the banking sector and to support core liabilities. The remuneration rate of the dollar-denominated required reserves, reserve options and free reserves held at the CBRT will be held close to the upper end of the U.S. Federal Reserve funds' target rate range.