Turkey’s central bank increased the amount of reserves banks must set aside, seeking to restrain a credit boom even as it cuts the benchmark interest rate to deter capital inflows.
The bank increased the reserve ratio for deposit and savings accounts of up to one month to 8 percent from 6 percent, according to the Official Gazette published in Ankara today. It also widened the scope of the requirement to include customer repurchase or repo accounts.
The central bank is seeking to discourage inflows of capital with lower interest rates while preventing overheating of the economy by making it more costly for banks to lend. The reserves decision was signaled yesterday when the bank cut the benchmark one-week repo rate to 6.5 percent from 7 percent.
That decision was “a cut that is probably not really a cut,” Yarkin Cebeci, Istanbul-based economist for JPMorgan Chase & Co., said in an e-mailed report. “By squeezing the profit margins of the banks, the central bank is trying to urge them to increase the interest rates on loans, hoping that this would restrain loan growth and curb domestic demand.”
Yields on two-year lira debt rose 1 basis point from a record low to 7.31 percent at 11 a.m. in Istanbul. The lira was little changed at 1.5216 per dollar.
The bank, which doesn’t pay interest on the reserves, is seeking to restrain consumer borrowing which has increased an average of 0.9 percent a week this year, helping Turkey’s gross domestic product expand an annual 8.9 percent in the first three quarters.
The higher reserve ratios will withdraw 7.6 billion liras ($5 billion) in liquidity, the bank said today. Yesterday it said that the net effect of its policy shift would “not be expansionary.”
Turkiye Vakiflar Bankasi TAO, which will have to set aside extra provisions worth about 5 percent of estimated net income next year, and Turkiye Is Bankasi AS will be among the worst- affected banks, Istanbul-based broker Ekspres Invest said in an e-mailed note.
The reserve requirement declines to 7 percent for deposits with a term of one to six months, 6 percent for those up to a year and 5 percent for longer than a year, while it was set at 8 percent for liabilities other than deposits. The ratio was previously 6 percent for all lira liabilities.
The central bank signaled its new strategy in a paper by Deputy Governor Erdem Basci published on its website last weekend. It had previously signaled that its next rates move would be an increase late next year.
Lower rates and higher reserve requirements can help restrain the current-account deficit, which has soared as capital inflows strengthen the lira and stronger domestic demand pulls in more goods from abroad, Basci wrote. The gap widened to $40.8 billion, or about 5.6 percent of GDP, in the 12 months to October as imports surged and export growth slowed.
The bank also increased minimum monthly payments on credit cards to between 25 percent and 40 percent of outstanding debt from a previous 20 percent, and reduced the interest rates and penalties that banks can charge.
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