Turkey Cuts the Amount of Cash Banks Need to Hold
(Bloomberg) -- Turkey cut the amount of cash lenders are required to hold in reserves for the first time in six months as the central bank tries to rouse credit growth without signaling a more drastic change in its tight policy stance.
With its crisis-level monetary settings on hold for three consecutive meetings, the central bank announced over the weekend that it’s lowering reserve-ratio requirements. QNB Finansbank estimates the move will release 3.3 billion liras ($623 million) and $2.3 billion into the financial system.
Although the central bank hasn’t disclosed how much in funds will be unlocked, Governor Murat Cetinkaya has recently said that steps to manage liquidity in support of financial stability wouldn’t necessarily mark a shift in its monetary policy.
The relatively small amount of cash covered by the decision suggests the impact on monetary conditions will be limited, according to QNB Finansbank analysts Erkin Isik and Deniz Gokce. “But it will support the continuation of a moderate pickup trend lately observed in loan growth,” they said in an emailed report.
- Lira reserve-requirement ratios have been reduced by 100 basis points for deposits and participation funds with maturities of up to a year and for other liabilities with maturities up to and including three years
- Ratios cut by 50 basis points for all other liabilities, the central bank said in a statement on Saturday
- Lenders will also be able to hold 10 percent of their required reserves in scrap gold, rather than 5 percent
- The total amount of loans extended by Turkish banks stood at 2.4 trillion liras as of December
Turkey’s economy probably slipped into recession after capping last year with two consecutive quarters of contraction as the lira’s crash and the ensuing jump in borrowing costs ripped through the Middle East’s largest economy. Real banking credit shrank by 7.2 percent on a quarterly basis in the last three months of 2018.
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“The central bank’s next move will likely be a rate cut. The conditions for easing are set: the economy is slowing down and financial markets are stabilizing. The central bank already moved with a cut to the reserve-requirement ratio.”
--Ziad Daoud, Bloomberg Economics
For more, see his TURKEY INSIGHT
Turkey last lowered the reserve-requirement ratios for lira and foreign-exchange liabilities in August, when its currency was in free fall. Cetinkaya said last week that the central bank’s use of the tool helped ease the extreme market volatility the country experienced last year.
Although the latest move won’t have a “sizable” impact on the lira, Istanbul-based brokerage IS Investment said the central bank’s liquidity adjustments should be monitored closely for their implications on the direction of monetary policy.
“If further steps are taken to ease liquidity, that might hurt the tight stance of the bank and currency,” IS Investment analysts said in a report.
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