Turkey's central bank takes new steps as part of 'liraization strategy'

Reuters

Turkey's central bank took fresh steps on Oct. 18 to boost lira deposits, raising the ratio of bonds that banks must hold for foreign exchange deposits and requiring those with less than 50% lira deposits to hold even more bonds from 2023.

The central bank raised the securities maintenance ratio required for foreign exchange (forex) deposits to 5% from 3% of deposits as of this month, and said further steps would be taken this year and next as part of its "liraization strategy".

In 2023, lenders with less than half of deposits in lira will need to hold an additional seven percentage points of bonds, marking the latest regulatory change meant to backstop an unorthodox policy of interest rate cuts amid soaring inflation.

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

"The 7 percentage points of additional bonds requirement is high, so it appears the central bank wants ... banks to have at least 50% and if possible 60% 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 80-100 billion lira ($4.3-5.4 billion) of bonds.

The bankers, requesting anonymity, also said individuals' lira deposits were now 46% of total deposits, while commercial entities lira deposits were 47%.

Also from 2023, banks whose lira deposits are between 50-60% of the total must hold an additional two percentage points of bonds beyond the 5% 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, due largely to monetary policy easing and high inflation.

The lira shed 44% versus the dollar last year and has fallen another 29% this year. Inflation was 83% last month.

The central bank has urged forex conversions with a series of rules beginning in December 2021, when a historic currency crisis hit, after which lira deposits rose.

"The practice has strengthened banks' balance sheets and supported financial stability," the central bank said.

By the beginning of 2023 the level of securities banks must hold will be based on lira-deposit share targets.

Previously, the central bank required banks to hold an additional 7% of securities if they had a conversion rate from forex to lira of less than 5% of their deposits.

BDDK regulator data shows individuals' forex deposits amounted to 2.69 trillion lira ($144.74 billion) as of Oct. 7, while lira deposits totalled 2.02 billion lira.

In the same period, forex deposits of commercial entities were 1.61 trillion lira while lira deposits were 1.27 trillion lira.

The central bank is expected to cut its policy rate again this week, by 100 basis points to 11%, a Reuters poll shows, after President Recep Tayyip Erdoğan called for more easing each month and said rates should be single digits by year-end.