The Central Bank of the Republic of Turkey (CBRT) on Monday raised the remuneration rates on required lira reserves by 200 basis points for all banks, taking a further backdoor tightening step that rolls back measures it had adopted to ease the coronavirus fallout.
It is the latest effort to support the Turkish lira that touched an all-time low last week at nearly 8 against the U.S. dollar and comes after a surprise policy tightening last month.
The bank on Friday also raised the lira swap rate, which it uses in weekly currency swaps, by 150 basis points to 11.75%, up from 10.25%.
The central bank said lenders that meet real loan growth requirements will have a 9% remuneration rate on lira required reserves, while the rate for others will be 2%. The new rates will be effective as of Oct. 16.
The bank also said it halved the commission rate on required reserves for forex deposits and participation funds. The rate now stands at 0.0125% for dollars and 0.00125% for other currencies.
The moves will improve financial stability and the monetary transmission mechanism, central bank sources said, adding that they will also decrease the banking system's transaction costs.
The central bank has recently taken liquidity steps to normalize policy since coronavirus restrictions were lifted were mostly lifted in June.
The bank's mostly backdoor steps have raised the average cost of funding to 11.64% as of Friday. The policy interest rate was raised to 10.25% last month.
Such steps have raised expectations for another rate hike at next week’s monetary policy meeting after the bank unexpectedly raised its policy rate by 200 basis points last month.
The benchmark one-week repo rate had been held at 8.25% since May, in the middle of Turkey’s coronavirus lockdown, following a nearly yearlong aggressive easing cycle that chopped it down from 24%.
The cost of funding is "still well below the new ceiling of 13.25%," said Win Thin, of Brown Brothers Harriman. "Another outright rate hike is possible (on Oct. 22) if the lira continues to weaken."