Turkish Central Bank Tightens Policy with Higher Reserve Requirements

In a new tightening move, the Central Bank of the Republic of Turkey (CBRT) raised required reserve ratios on short-term, Turkish lira-denominated external borrowing. The policy aims to curb short-term foreign funding by banks and may lead to upward pressure on loan interest rates.

Focus on Financial Stability and Transmission

According to the CBRT’s May 24 announcement, the decision was made to enhance macro-financial stability and strengthen the monetary transmission mechanism. With this measure, banks will face higher reserve requirements when borrowing short-term funds in Turkish lira from abroad.

Revised Reserve Requirement Ratios

Effective immediately, the reserve requirement ratios for short-term TL-denominated external borrowing have been updated based on maturity:

• Up to 1 month: Increased to 18%

• Up to 3 months: Set at 14%

• Up to 1 year: Remains at 12%

These changes apply to both Turkish lira loans obtained from abroad and funds raised via cross-border repo transactions.

Loans Could Get More Expensive

This measure makes short-term foreign borrowing less attractive and more costly for banks, creating a relative disadvantage compared to domestic deposit funding.

By encouraging a more disciplined and longer-term use of both domestic and external financial resources, the CBRT continues its commitment to tight monetary policy. While loan costs may rise in the short term, the medium- to long-term objective remains clear: reinforcing price stability and reducing inflation expectations.

“Beşyüzyedi” Analysis: Why Did Reference Rates Drop?

(Beşyüzyedi  is a Turkish financial news and commentary account on Twitter and Linked-In)

Alongside the reserve move, another major development caught market attention — the steep drop in Turkey’s overnight benchmark interest rate.

Overnight TLREF Falls Sharply

As of May 24, the Turkish lira overnight reference rate (TLREF) fell to 45.7950%, down from the previous 48.6186%. This significant shift is largely attributed to the excess lira liquidity created by the Central Bank’s recent foreign currency purchases.

The CBRT’s interventions led to the system’s funding need falling to zero, with overnight repo rates at Borsa Istanbul dropping to an average of 45.80%. This represents a structural interest rate drop of nearly 3 percentage points in a single day.

Ongoing FX Purchases

Since its last major FX sale on April 28, the Central Bank has steadily increased its net foreign currency position. Total purchases have reportedly reached nearly $13 billion, with minimal contribution from gold.

If this trend continues — as CBRT Governor Karahan hinted — we could see the reintroduction of Turkish lira deposit auctions and liquidity notes, potentially anchoring rates around 46%.

Not an Intentional Rate Cut

The decline in interest rates is not a deliberate policy cut but rather the result of Turkey’s interest rate corridor mechanism. If liquidity tightens again — through either new FX sales or further reserve requirement hikes — overnight rates could swiftly return to 49%.

Where the rates land depends entirely on the Central Bank’s discretion and liquidity management tools.

Commentary: Liquidity Abundance a Hidden Risk?

The CBRT’s most recent Inflation Report emphasized policy credibility and the commitment to disinflation. However, some signals raise concern.

Improvements in inflation expectations seem to have stalled in May. Domestic demand continues to grow at a pace inconsistent with the disinflation path. Meanwhile, lira conversion from FX accounts has triggered excess liquidity in the system — something the CBRT is struggling to absorb.

This abundance of liquidity risks undermining the effectiveness of the tight monetary stance by pushing loan rates downward. That’s precisely why the CBRT is now acting with macroprudential tools to counteract the unintended easing in credit conditions.

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