CBRT pushing all the buttons to curb demand for foreign currency as tightening cycle ended

In the lead-up to the local elections, despite a new upward surge in inflation, the CBRT, expected not to increase interest rates, implemented a daily block on banks’ TL reserve requirements yesterday.

As the countdown to the local elections continues, the escalating demand for foreign currency among domestic residents, inflation data surpassing expectations, and uncertainties surrounding the post-election period have prompted successive steps from economic policymakers in recent days. Most recently, the Central Bank initiated a partial block on required reserves based on bank size and began applying interest on deposits with a maturity of up to 1 month. Economists noted that these measures aim to attract liquidity, emphasizing that while an interest rate hike is not anticipated at the March meeting prior to the elections, it may become inevitable at the April meeting. The banking index responded negatively to this new development, experiencing a decline exceeding 4.75 percent throughout the day.

Nearly 6 billion dollars increase in foreign currency deposits

As the local elections approached, domestic residents, drawing from past experiences, intensified their demand for foreign currency. The Dollar/TL surpassed 32 and Euro/TL exceeded 35 levels. Economists’ calculations indicate that during the week of March 1-8, foreign currency deposits in the banking sector surged by $5.9 billion, reaching $207.1 billion. This weekly spike marks the most rapid increase in foreign currency deposits witnessed in the past two years. Concurrently, the Central Bank’s swaps with banks rose by $6.2 billion in the same week. In the free market, gram gold prices soared above 2400 liras. In response to this escalating demand, the disparity between free market and interbank market foreign exchange rates widened following actions from the economic administration, which had issued verbal warnings against foreign exchange transactions the previous week.

Furthermore, the Central Bank tightened restrictions on both commercial and personal loan growth last week. According to sources within the banking sector, this measure was driven by heightened demand for foreign currency and gold among legal entities utilizing loans. Additionally, banks were instructed verbally to raise rates for commercial and general purpose loans. Central Bank data reveals that at the start of March, the average interest rate for TL commercial loans stood at 54 percent. Some public banks even reached commercial loan rates of up to 60 percent, pushing the sector’s average to 58-60 percent, with certain banks imposing credit limit constraints. Reuters reported that some banks imposed a ceiling of 100 thousand liras on revolving loans. Moreover, banks began imposing both installment limitations and cash advance limit restrictions on credit cards.

Expectations for a rise in TL deposit rates

A final move to prevent the liquidity from shifting to foreign currency came yesterday. According to Reuters, the Central Bank (CBRT) announced new reserve requirement steps that will tighten TL liquidity in the banking system and have an upward impact on deposit rates. Bankers said that the practice of blocking reserve requirements introduced with the amendments will tighten TL liquidity and thus have an upward impact on deposit rates. Experts noted that before the amendment, banks could flexibly hold zero RR on any day they wanted, but now a certain amount will be blocked.

The implementation will start on March 15 and continue until January 5, 2025. In addition, according to bankers, the CBRT’s newly introduced practice of paying interest on required reserves for short-term TL deposits will have an additional upward impact on short-term deposit rates. This practice will start on March 16.

Interest also applied to short-term deposits

The changes made by the CBRT with the implementation instruction are as follows: “The CBRT decided that a portion of the average TL required reserves held in free accounts will be held in blocked accounts. Banks with assets above TL 500 billion will hold 25 percent of the required reserves for TL liabilities in blocked accounts. Banks with assets of over TL 100 billion will hold 15 percent of the required reserves for TL liabilities in blocked accounts. The CBRT included deposits with a maturity of less than one month in the practice of paying interest on required reserves every three months.”

Economists stated that these moves are aimed at attracting liquidity and preventing it from shifting to foreign currency and gold, and emphasized that the Central Bank, which is unlikely to raise interest rates at the March Monetary Policy Committee meeting next week, is trying to spend this month with quantitative tightening as stated in the MPC texts.

FX demand is not because of low deposit rates!

The banking sector source said that the Central Bank has signaled that it will continue to tighten with macroprudential measures and that these moves are not a surprise, stressing that it is not known how much TL liquidity will be withdrawn with this move, but it will push deposit rates up. Stating that this will also raise interest rates on the short-term bond side, the source pointed out that funding costs will increase significantly. The source said that these steps are expected to attract liquidity and have an impact on inflation expectations, but this is not very possible, noting that the Central Bank will have to raise interest rates in April, if not in March. The source said that the increase in deposit rates may pull down the demand for foreign currency to some extent, adding that the demand exploded after the inflation data that came above expectations and that this move also aims to regulate this. The source said that domestic residents do not buy foreign currency because they find the deposit interest rate low, saying that it is a more psychological transaction, noting that the TL deposit interest rate with a maturity of up to 3 months, which is currently 53.25 percent according to the Central Bank’s average data, is not very attractive when it comes to inflation that will exceed 75 percent in May.