Turkish central bank takes more steps to boost lira deposits

NurPhoto/Diego Cupolo

• Central bank wants lira deposits to be at least 50% of total
• More measures in the ‘liraisation strategy’ will be unveiled next year
• Turkey is cutting interest rates though inflation hit 84 percent last month

Turkey’s central bank took fresh steps to boost lira deposits on Tuesday, raising the ratio of bonds that banks must hold for foreign exchange deposits and requiring those with less than 50 percent lira deposits to hold even more bonds from next year.

The central bank raised the securities maintenance ratio required for forex deposits to 5 percent of deposits, from 3 percent, as of this month. It said further steps would be taken this year and in 2023 as part of its “liraisation strategy”.

In 2023, lenders with less than half their deposits in lira will need to hold an additional seven percentage points of bonds – the latest regulatory change designed to backstop an unorthodox policy of cutting interest rates as inflation soars.

Yields on the treasury’s 10-year benchmark bond fell to 11.32 percent in response, from 13.12 percent on Monday. The lira was little changed at 18.5890 against the dollar.

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“The 7 percentage points of additional bonds requirement is high, so it appears the central bank wants banks to have at least 50 percent and, if possible, 60 percent of deposits in lira next year,” said a forex dealer at one bank.

Bankers told Reuters the new rules would require lenders to hold an additional 80 billion to 100bn lira ($4.3bn to $5.4bn) of bonds.

The bankers, who declined to be named, also said individuals’ lira deposits were now 46 percent of total deposits, while commercial entities’ lira deposits were 47 percent.

Also under the liraisation strategy, banks whose lira deposits are between 50 and 60 percent of the total must hold an additional 2 percentage points of bonds from 2023, beyond the 5 percent set for this year, the central bank said.

Turks have snapped up dollars in recent years to hedge against one of the deepest currency depreciations in emerging markets, mainly down to monetary policy easing and high inflation.

The lira shed 44 percent versus the dollar last year and has fallen another 29 percent this year. Inflation stood at 83 percent last month.

The central bank began encouraging forex conversions with rule changes in December 2021.

“The practice has strengthened banks’ balance sheets and supported financial stability,” the central bank said.

The bank is expected to cut its policy rate again this week, by 100 basis points to 11 percent, after President Recep Tayyip Erdogan called for more easing each month. He said rates should be single digits by year-end.