Home MarketsEurope & Middle East Türkiye opts for a new adjustment strategy after indicating a pause in increases

Türkiye opts for a new adjustment strategy after indicating a pause in increases

by SuperiorInvest

A photo taken on August 14, 2018 shows the logo of the Central Bank of Turkey at the entrance to its headquarters in Ankara, Turkey.

ADEM ALTAN | AFP | fake images

Turkey's central bank is opting for a different method of monetary tightening as it grapples with rising inflation, having previously signaled that its rate-hiking cycle was over.

The institution sent a directive to lenders, starting Friday, instructing them to put parts of their required lira reserves into blocked accounts.

This has raised lending rates and reduced lending limits at some banks, with some lenders lowering their commercial lending limits to 100,000 lira, or $3,100, Reuters reported on Thursday.

“Some banks have stopped lending. Some banks are even withdrawing their already granted loans. This will lead to further liquidity tightening,” Arda Tunca, an Istanbul-based economist at PolitikYol, told CNBC.

“If a central bank is willing to reduce the inflation rate, liquidity conditions should surely be reduced, but the methodology is of utmost importance,” he said. “If the methodology is wrong, market expectations cannot be managed.”

In fact, shares of Turkish banks fell after the news on Thursday. Economic data platform Emerging Market Watch posted on X, describing the central bank as taking “another tightening step through reserve requirements.”

Analysts at London-based Capital Economics made similar observations.

“In the last month, new quantitative and credit adjustment tools have been announced,” the firm wrote in a research note. “Last week, the CBRT tightened restrictions on the growth of lira loans, a move that would likely have a similar impact to an increase in interest rates.”

Meanwhile, Turkey in January recorded its first monthly drop in reserves since May 2023, according to balance of payments data published this week.

Turkey's annual consumer price inflation soared to 67.07% in February. The strong numbers have fueled concerns that Turkey's central bank, which had indicated last month that its painful eight-month cycle of rate hikes was over, may have to tighten again.

“Pressures on Turkish policymakers are increasing ahead of local elections on March 31, as capital inflows have slowed and foreign exchange reserves are falling again,” wrote Capital Economics. “We doubt the central bank will raise interest rates next week, but we are increasingly convinced that there will at least be another hike in the second quarter.”

— CNBC's Dan Murphy contributed to this report.

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