Turkey scraps measures designed to increase lira holdings

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Turkey has loosened bank rules designed to prompt consumers and businesses to reduce dollar holdings, the latest sign of how President Recep Tayyip Erdoğan’s new economic team is pursuing some of his unorthodox policies. Finishing it

The central bank’s announcement that it would cut requirements for banks to hold lira-denominated assets against foreign currency deposits was followed by policymakers nearly doubling the benchmark interest rate as part of a plan to return to “rational” economic policies. Came just a few days after doing 15 percent.

Erdoğan’s unorthodox economic measures in his last term distorted Turkey’s economy, leading to rapid growth but high inflation, a large trade deficit, and many exporters complaining that the lira was overvalued despite a sharp decline. Is. The government’s pressure on consumers and businesses to hold fewer dollars has been compared to capital controls because it makes foreign exchange transactions more expensive.

The central bank, run by former Goldman Sachs executive Hafiz Gay Erkan, said Sunday’s decision was the “first step” in moving towards a more “simplified” approach to policymaking.

A series of unorthodox policies under Erdoğan’s direction, such as keeping borrowing costs low despite inflation hitting above 85 percent last year and special savings accounts that reimburse depositors when the lira falls at government expense, have helped Turkey’s economy. weakened rapidly. The country is grappling with a record current account deficit and foreign investment in local assets has plummeted. Inflation is still close to 40 percent.

Finance Minister Mehmet Simcek, a former senior Merrill Lynch bond strategist who likes Erkan, was appointed by Erdoğan this month after the leader’s re-election in May, pledged this week that Turkey would move towards a “rules-based will be transferred to fiscal and monetary policies. Focus on achieving price stability and “sustainable growth”.

As part of the government’s previous “lira-ization” strategy, local businesses and consumers, who have seen the lira depreciate 65 percent against the dollar over the past two years, have been repeatedly tweaking banking rules in an effort to convert their income and savings. The bar was changed. in foreign currency.

Foreign investors have said that one of the key elements in restoring confidence, in addition to tightening monetary policy, would be to reduce the use of measures that have caused large imbalances in Turkey’s $900 billion economy.

Turkish banks’ holding of lira-denominated securities as collateral is set to rise from TL360bn to TL1tn in June 2022 when the rule comes into force, according to data from the Banking Regulation and Supervision Agency. Haluk Burumceki, an Istanbul-based economist, said “safety maintenance requirements”, which force banks to hold lira-denominated bonds on top of reserves required for foreign currency deposits, have helped the rise.

The rules encouraged banks to offer higher interest rates on lira deposits to increase the overall share of their total deposits denominated in lira, according to Enver Erkan, chief economist at Istanbul-based brokerage Dinamic Yatirim Menkul Degerler.

The central bank stopped cutting requirements entirely on Sunday. It reduced the safety maintenance ratio from 10 percent to 5 percent. Monetary policymakers also changed the rule under which banks have to pay a higher maintenance requirement if they hold less than 60 percent of their total deposits in liras, reducing the limit to 57 percent.

Dinamic’s Erkan, who said Sunday’s announcement also relaxed “several” other related rules, suggested another reason for relaxing the requirements could be because the lira’s recent big drop has forced dollar deposits. Demand had increased, something that would have put pressure on the banks’ safety maintenance ratio.