Turkey raises RRR for FX, suspends one-week repos10th May 2019
Turkey’s central bank raised its reserve requirement for foreign currency liabilities and lowered the amount of foreign currency banks can use as part of their lira reserves in a move that will withdraw some 7.2 billion Turkish lira in liquidity from the banking system.
The Central Bank of the Republic of Turkey (CBRT), which last month puzzled analysts by dropping any reference to further monetary tightening, also suspended its one-week repo auctions “for a period of time,” effectively raising its lending rate by 150 basis points.
CBRT said the change to reserve requirements was taken “to support financial stability” in light of recent developments in financial markets and its statement about the suspension of one-week auctions cited “developments in financial markets.”
The lira, which has weakened sharply this week after the decision to re-run elections in Istanbul, quickly rose 0.6 percent to 6.21 against the U.S. dollar after the news.
But the lira remains almost 5 percent below the level seen before the last monetary policy meeting on April 25 and down 15 percent since the start of this year.
The change to reserve requirements means banks will now have to set aside 100 basis points more with the central bank of their foreign currency liabilities while foreign currency can only account for a maximum 30 percent instead of 40 percent of required reserves.
The suspension of the one-week auctions means banks will pay 25.50 percent instead of the policy rate’s 24.0 percent for funds.
As part of CBRT’s overhaul of its interest rate structure in June 2018, when the one-week repo rate was set as the policy rate, overnight borrowing and lending rates are 150 basis points above or below the policy rate.
On April 25 CBRT left its one-week repo rate steady at 24.0 percent, unchanged since September 2018, but dropped its earlier reference to tightening monetary policy further if needed.
The dovish shift puzzled analysts as inflation has hardly budged in the last three months – it fell to 19.5 percent in April from 19.7 percent in March and 19.67 percent in February – and the lira has continued to fall, raising import prices and thus inflation pressures.
Following the policy statement, CBRT Governor Murat Cetinkaya held a briefing on April 30 in connection with the latest inflation report where he sought to ease concerns the central bank was giving in to political pressure to lower interest rates and boost the economy.
According to press reports, Cetinkaya said additional tightening would still be delivered if upside risks to inflation materialize but he failed to answer why the policy statement had dropped its reference to further tightening if needed.
In its inflation report, CBRT maintained its forecast for inflation to fluctuate between 12.1 percent and 17.1 percent this year, ending the year at 14.6 percent.
In 2020 inflation is seen fluctuating between 5.1 percent and 11.3 percent, ending the year at 8.2 percent before gradually stabilizing around CBRT’s 5.0 percent target.
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