Turkiye takes new steps to protect lira after rate hikes end

Turkiye has amended regulations to deter savers from flocking to foreign currencies and relieve pressure on the lira after ending an aggressive cycle of interest-rate hikes this month.
The central bank is making it more costly for commercial lenders to have deposits in hard currencies, while at the same time easing mandatory reserve requirements on some foreign exchange-linked accounts, which are part of a government-backed savings programme meant to shore up the lira.
Policymakers have been preparing additional measures to encourage more savings in the local currency and ensure the transmission of rates into the economy after completing their tightening cycle last week by raising the benchmark to 45%.
The latest steps follow a decline in the rates of interest offered on regular lira deposits, which could prompt local savers to look for alternatives with inflation set to accelerate past 70% in the coming months.
Domestic lenders will now have to set aside more money for deposits and participation funds denominated in foreign exchange, the central bank said on its website. On top of existing rules on required reserves, an additional ratio for these accounts that must be maintained in liras has been doubled to 8%.
The monetary authority is also lowering requirements on FX-linked saving accounts of up to six months, cutting their mandatory ratio to 25% from 30%. Under the mechanism, lira depositors can hedge against currency losses by getting state-guaranteed compensation for any depreciation that exceeds the interest on the accounts.
The measures will partly offset each other, according to QNB Finansbank economists, who estimate the net impact will result in withdrawing some excess liquidity from the system.
A liquidity glut is intensifying in Turkiye as efforts by the central bank to rebuild international reserves and the need to cover losses on the FX-protected deposits release hundreds of billions of liras into the economy.
Looking ahead, the expectation is that the central bank will move more aggressively to drain the excess liras with measures that might include issuing liquidity bills for the first time since 2007.
The central bank has been heavily using swaps, which are longer-term contracts and therefore allow lenders to borrow at a cheaper cost than the benchmark one-week repo rate. The main way to tackle excess liquidity would be to balance out its funding channels of swaps and open-market operations, said Cem Cakmakli, associate professor in economics at Durham University in England.