Turkey’s central bank is adopting a novel approach to monetary tightening amid surging inflation, diverging from its earlier stance indicating the cessation of its rate-hiking trajectory.
In a recent move effective Friday, the institution directed lenders to allocate portions of their mandated lira reserves into blocked accounts.
This directive has propelled loan rates upwards and curtailed the loan capacities of certain banks, some of which have slashed commercial loan ceilings to 100,000 lira, or $3,100, as reported by Reuters on Thursday.
“Some banks have halted lending. Others have even recalled previously extended loans. This is anticipated to exacerbate liquidity constraints,” remarked Arda Tunca, an economist at PolitikYol based in Istanbul, speaking to CNBC.
Tunca emphasized the criticality of the methodology employed by the central bank in its quest to deflate inflation, asserting, “If a central bank aims to curb inflation, liquidity conditions must undoubtedly be tightened, but the approach is paramount. A flawed methodology could lead to unmanageable market expectations.”
Indeed, Turkish bank stocks witnessed a decline following the announcement on Thursday. Emerging Market Watch, a platform for economic data, highlighted the central bank’s move as “another tightening step through reserve requirements.”
Echoing similar sentiments, analysts at the London-based firm Capital Economics noted, “Over the past month, new quantitative and credit tightening measures have been introduced. Last week, the CBRT imposed stricter regulations on lira loan expansion, a measure likely to yield effects akin to an interest rate hike.”
Meanwhile, Turkey reported its first monthly decline in reserves since May 2023, according to recently released balance of payments data.
In February, Turkish annual consumer price inflation surged to 67.07%. These robust figures have ignited apprehensions that Turkey’s central bank, which had hinted last month after its arduous eight-month-long rate-hiking spree, might need to revert to tightening measures.
“Pressure on Turkish policymakers is intensifying ahead of the local elections on March 31st, as capital inflows dwindle and foreign exchange reserves dwindle once more,” Capital Economics underscored.
“Although we are skeptical about an interest rate hike next week, we are increasingly convinced that at least one more hike will be implemented in Q2.”
