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Turkey Unwinds Measures Designed to Increase Lira Holdings

Central bank calls move ‘first step’ towards a more conventional monetary policy. Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.comT&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here.

Turkey has loosened bank regulations designed to push consumers and businesses to reduce dollar holdings, in the latest sign of how President Recep Tayyip Erdoğan’s new economic team is unwinding some of his unorthodox policies. The central bank’s announcement that it will cut requirements for banks to hold lira-denominated assets against foreign currency deposits came just days after policymakers nearly doubled the benchmark interest rate to 15 per cent as part of a plan to return to “rational” economic policies.

Erdoğan’s unconventional economic measures in his previous term warped Turkey’s economy, creating fast growth but very high inflation, a huge trade deficit and a lira that many exporters complain is overvalued despite a sharp fall. The government’s push for consumers and businesses to hold fewer dollars has been likened to capital controls because it makes foreign currency transactions more expensive.

The central bank, which is helmed by former Goldman Sachs executive Hafize Gaye Erkan, said Sunday’s decision was the “first step” in moving towards a more “simplified” approach to policymaking. Under Erdoğan’s direction a series of unorthodox policies, such as keeping borrowing costs low despite inflation peaking above 85 per cent last year and special savings accounts that reimburse depositors when the lira falls at the government’s expense, have made Turkey’s economy increasingly vulnerable. The country is saddled with a record current account deficit and foreign investment in local assets has plummeted. Inflation is still close to 40 per cent.

Finance minister Mehmet Şimşek, a former senior Merrill Lynch bond strategist who like Erkan was appointed by Erdoğan this month after the leader’s re-election in May, pledged this week that Turkey would shift to “rules-based” fiscal and monetary policies, with a focus on achieving price stability and “sustainable growth”. Under the government’s previous “lira-isation” strategy, banking regulations were changed frequently in an attempt to keep local businesses and consumers, who have seen the lira tumble 65 per cent against the dollar in the past two years, from converting their income and savings into foreign currency.

Foreign investors have said one of the key elements in restoring confidence, in addition to tightening monetary policy, will be reducing the use of measures that have caused big imbalances in Turkey’s $900bn economy. Turkish banks’ holdings of lira-denominated securities as collateral have boomed to TL1tn from TL360bn in June 2022 when the rules came into effect, according to data from the Banking Regulation and Supervision Agency. The “security maintenance requirements”, which force banks to hold lira-denominated bonds on top of required reserves for foreign currency deposits, have helped drive the rise, said Haluk Bürümcekçi, an Istanbul-based economist.

The rules also encouraged banks to offer high interest rates on lira deposits to boost the overall share of their total deposits denominated in lira, according to Enver Erkan, chief economist at Istanbul-based brokerage Dinamik Yatırım Menkul Değerler. The central bank on Sunday stopped short of cutting out the requirements altogether. It reduced the security maintenance ratio to 5 per cent from 10 per cent. Monetary policymakers also tweaked a rule that required banks to pay a higher maintenance requirement if less than 60 per cent of their total deposits are lira, reducing the threshold to 57 per cent. Dinamik’s Erkan, who said “many” other related regulations were also eased in Sunday’s announcement, suggested another reason for the move to loosen requirements might have been because the lira’s recent large fall had increased demand for dollar deposits, something that would have put pressure on banks’ security maintenance ratios.

Source : Financial Times