Highlights from Gaye Erkan’s Inflation Report presentation—1

Now, I would like to elaborate on the monetary policy strategy we are implementing in line with this objective.


As we also stated in the previous Report, we designed the monetary tightening process in a holistic manner.


We have increased our policy rate from 8.5 percent to 35 percent. With the decisions taken at the Monetary Policy Committee meetings between June and October, we implemented a strong policy hike by 26.5 points in total.


In this process, we also introduced quantitative tightening and selective credit policies to complement the rate hikes.


Regarding the details of quantitative tightening in this context, we introduced reserve requirement ratios on FX-protected deposit accounts, and set these ratios at 15 percent initially.


Subsequently, we raised the required reserve ratios to 25 percent for FX-protected deposits, and lowered these ratios to 5 percent for accounts with longer maturities.


Thus, a total of 700 billion TL worth of quantitative tightening has been made through sterilization.


With our decision, which came into effect as of today, we increased the required reserve ratios by 5 points each, to 30 percent and 10 percent for the relevant maturities, respectively. In addition, we decided to impose an additional 4 percent required reserve for foreign currency deposits in Turkish lira. Thus, an additional 350 billion Turkish lira of liquidity will be withdrawn from the system, and the total sterilization will exceed 1 trillion Turkish lira.


In the context of selective credit tightening, we attach importance to maintaining the economy’s production capacity on one hand, while contributing to rebalance demand on the other.


Accordingly, we lowered auto and commercial loan growth caps to curb excessive domestic demand.


At the same time, we raised credit card maximum interest rates in line with the policy rate hike.


On the other hand, there is no loan growth cap for commercial loans for export, investment and agriculture, and the interest rate cap has been kept lower.


Together with these steps, during the simplification of the macroprudential framework, while we lowered the interest rate threshold value for general-purpose loans to a single tier, we abolished thresholds for commercial loans.


Additionally, in line with the healthy credit growth and distribution in the recent period, we abolished the practices of securities maintenance and lending against expenditure for flow credits.


On the deposits-related regulations side, we took simplification steps to encourage the transition to Turkish lira deposits to increase the share of TL in total deposits.


In this process, exempting the switch from FX-protected deposits to TL deposits from the securities regulation, we subjected these deposits to commission regulation.


We consider that the steps we have taken in relation to TL deposits are critical for a stronger monetary transmission mechanism.


Distinguished Guests,


Although targeted effects of our monetary policy steps will become fully visible over a period of time, I will now present to you some of the promising preliminary results we have achieved so far.


The deposit rates increased in line with the policy rate, and the transmission of the policy rate to deposit rates has strengthened.


Simultaneously, the negative spread between commercial loan rates and deposit rates has ended, leading to a healthier balance in the banking sector.

In line with our selective credit policy, consumer loan rates remain well above commercial loan rates.


As a positive reflection of our monetary policy strategy, retail loans have significantly slowed compared to the previous reporting period.


As you may recall, in the first half of 2023, retail loans grew significantly above historical averages driven by credit cards and auto loans.


In response to our selective credit measures, retail loans grow in line with the new limits set in July.


As illustrated in the slide, the 4-week growth rates for retail loans declined to 2.1 percent in October from its peak of 7.4 percent in early April. The growth rate for auto loans decreased to 0.8 percent, while general-purpose loans remained relatively flat at around 1.4 percent.


Spending on personal credit cards, which are used both as consumption and borrowing instruments, is relatively high at 4.2 percent, but progressing towards a milder path.


The commercial loan flow shows continuity and contributes to production capacity.


Having accelerated in the first half of 2023, commercial loan growth came to a standstill at the end of May.


With the gradual and steady increase in the policy rate and the simplification of the macroprudential framework, we restored the market mechanism.


Thus, with the recovery of the Turkish lira-denominated credit flow to the real sector, commercial loans assumed a balanced and sustained growth path.


The improvement in the functionality of the credit market mechanism also became visible in the distinction between private and public banks. Private banks have started to play an active role in commercial loan growth.


Also noteworthy is the improvement in the composition of commercial loans thanks to our effective steps towards selective credit tightening.


In fact, investment and export loans recovered to increase by more than six-fold in the July-September period, after a standstill in the May-June period.


The CBRT-mediated rediscount and advance loans against investment commitment also increased in this period.


Thus, rediscount loans and advance loans against investment commitment, have contributed significantly to the commercial loan composition as targeted over the last three months.


Developments regarding deposits reveal the favorable effects of our decisions in late August that encouraged transition from FX-protected deposits to TL time deposits.


As a result of our decisions, the demand for Turkish lira savings instruments, particularly time deposits, increased. As of 20 October, TL deposits rose by 970 billion Turkish liras in only eight weeks, while FX-protected deposits declined by 300 billion Turkish liras and FX deposits by 3.9 billion dollars.

Consequently, the share of TL deposits in total deposits increased by around 5 percent. We expect the effects of the regulations that we have strengthened on deposit composition to become more apparent over time.


In the meantime, I would like to emphasize that our reserves continue to increase.


The CBRT’s international reserves have been on a strong rise since June.


As of 20 October, gross international reserves were up by more than 28 billion dollars compared to the end of May, to over 126 billion dollars.


The increase of reserves against the decline in the FX-protected deposit balance indicates that our strategy of switching to deposits is on the right track.


policies that we have introduced recently also had a positive impact on financial markets.


The policy normalization incorporating tight monetary stance and macroprudential simplification had a significant impact on the CDS premium.


Having hovered around 700 basis points in May and declining to around 370 basis points, the 5-year CDS premium is currently below 400 basis points despite geopolitical uncertainties.


Another positive outcome of our policy stance is the decline in exchange rate volatility.


The exchange rate volatility implied by one-month US dollar/Turkish lira options fell sharply from around 60 points in May to almost 10 points.


Despite various unfavorable global developments I have mentioned at the beginning of my speech, financing conditions remain balanced. We aim to decisively implement our policies that we have developed with a holistic and sustainable approach and boost the positive effects on financing conditions.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.