Turkey's central bank moved on Friday to cool down red-hot loan growth by raising banks' lira reserve requirements, a day after it slashed overnight borrowing rates to deter speculators betting on currency appreciation.
The increase in reserve requirements, the second this year, will withdraw 2.1 bln lira ($1.4 bln) from the market, the central bank said. It signaled that more such moves are on the way if loan growth escalates further.
The step, upping reserve requirements to 6% from 5.5%, comes on the heels of the central bank's decision on Thursday to cut overnight borrowing rates by 400 basis points to encourage investors to hold lira deposits for longer.
Reserve requirements could be tightened further, central bank Governor Durmus Yilmaz indicated.
"Loan growth is not causing the economy to overheat, but we must be ready to take proactive measures," he told reporters.
Earlier Yilmaz told a conference: "The reserve requirement rates could be used more actively if the growth in loans threatens financial stability.
Loan volumes in the Turkish banking system have surged 23% so far this year and stood at 488 bln lira ($339 bln) at the end of October, according to data from the Turkish Banking Association.
The central bank had raised the lira reserve requirement half a percent in September and said last month it may raise it to 6% by year-end. The reserve requirement for foreign currencies remained at 11%. "We see that the bank decided to act sooner rather than later, and this shows the nervousness and determination of the bank," JP Morgan economist Yarkin Cebeci.
"We believe that the bank is seriously worried about the fast loan growth and robust domestic demand," he said.
Turkish markets were broadly weaker, with the lira down to 1.436 against the dollar in early interbank trade from a spot close of 1.423 on Thursday. Equity markets fell sharply, with some bank shares losing over 2%.
Turkey's commercial banks have complained that the increased reserve ratios have raised costs, which they will have to pass on to consumers by raising loan rates.
Yilmaz said the bank could possibly lower the reserve ratio for deposits longer than one year, as that could encourage people to park their money in longer maturities.
SPECULATIVE LIRA INFLOWS
Turkey also moved to curb short-term flows, its actions mirroring efforts by other emerging policymakers to tackle speculative the portfolio flows pushing up their currencies.
The lira has risen 5% against the dollar this year.
As expected, the central bank left its one-week repo policy rate unchanged at 7% at Thursday's monetary policy meeting but surprised by slashing overnight borrowing rates to 1.75%.
The overnight lending rate was held steady at 8.75%, widening the band to a record 700 basis points.
Analysts said the borrowing rate cut was designed to deter short-term investors from betting on lira appreciation, and the move would also encourage banks to lend more to each other. The bulk of foreign money is parked overnight in the money market.
In a related step, the bank on Thursday also cut the late liquidity window borrowing rate to zero from 1.75%.
The decision to cut both rates sends a signal the central bank wants to discourage investors from holding short-term deposits, Danske Bank chief analyst Lars Christensen said.
"This seems to be a manoeuvre designed to reduce the speculative capital and portfolio inflows into the lira coming from international investors," he said. "The actions from the central bank in our view clearly increase the risk of a larger negative correction in the Turkish lira."
