The new measures introduced by the Turkish central bank will ensure the sterilization of excess liquidity, support lira deposits and prevent excessive lending growth, its governor said on Friday.
On Thursday, the Central Bank of the Republic of Türkiye (CBRT) kept its benchmark policy rate unchanged at 50% for a second consecutive month, as expected, though it remained wary of inflation risks.
Shortly after the Monetary Policy Committee (MPC) meeting, the bank announced it would increase required reserve ratios for lira and the so-called foreign exchange-protected deposit accounts.
It also imposed a limit of 2% on monthly foreign exchange credit growth. Bankers estimate that over TL 500 billion of liquidity will be permanently withdrawn from the market.
Speaking at the International Arab Banking Summit in Istanbul on Friday, Governor Fatih Karahan highlighted the "complementary" role of the CBRT's recent macroprudential measures in the ongoing tightening monetary policy process.
Since the general elections last year, the central bank has raised its policy rate by 4,150 basis points in total since June last year to tackle runaway inflation, marking a shift from years of loose monetary policy.
Karahan acknowledged that the regulations periodically complicate balance sheet management for banks but emphasized that the overall monetary policy approach remains supportive of growth in the banking sector.
He stated that the latest regulations "will play a role in sterilizing excess lira liquidity, supporting the transition to lira deposits and curbing excessive credit growth."
The move on Thursday will facilitate a faster switch to regular lira deposits. The foreign exchange-protected deposit scheme, known as KKM, was launched in late 2021 to help reverse dollarization and support the lira.
It sought to encourage people to keep their savings in lira through guarantees to compensate for losses from decline against hard currencies.
The government has been working for months to exit the scheme, which has been a major drag on the country's international reserves.
Karahan reiterated that the CBRT will maintain a tight monetary policy stance until there is a "significant and sustained decline" in the underlying trend of monthly inflation and inflation expectations align with the projected forecast range.
The governor reiterated expectations that inflation would peak at as high as 75% in May, with a projected decline in headline inflation starting in June.
The inflation, currently running at nearly 70%, is anticipated to end the year at 38%.
"We initiated a tightening cycle last June to restore price stability and have already seen significant improvements in the current account balance, foreign exchange reserves, some moderation in domestic demand and increased preference for lira-denominated financial assets," Karahan said.
Karahan reported that the share of lira deposits in the banking system rose from 31% in August 2023 to 45%.
He added that the tight policy stance will reduce the underlying trend of monthly inflation through "balancing domestic demand, real appreciation of the lira and improvement in inflation expectations."
Karahan also underscored that the banking sector stands to benefit the most from the disinflation process.
