Turkey central bank abolishes unorthodox step that fuelled borrowing boom

Turkey’s central bank abolished an unorthodox measure that penalised banks for failing to meet loan growth goals in a move welcomed by foreign investors.

Banks will be required to set aside the same reserves with the central bank, regardless of their credit growth, the central bank said in a statement on Friday. The same renumeration rate will also be applied to all lenders, it said.

The central bank had introduced measures to coerce banks into lending more to consumers and businesses to back the government’s economic growth goals. But the steps resulted in a borrowing boom that destabilised the economy and led to sharp losses for the lira against foreign currencies.

“Looks like the grown ups are in charge of the central bank again,” Tim Ash, senior emerging markets strategist at London-based investment firm and hedge fund BlueBay Asset Management, said in comments on Twitter.

The remuneration rate on lira required reserves was set at 12 percent for all banks, the central bank said. It increased required reserves for the banking system across all currencies and loan maturities.

The decision follows the arrival of Naci Ağbal, a former finance minister, as central bank governor on Nov. 7. President Recep Tayyip Erdoğan appointed Ağbal after the lira slumped to successive record lows against the dollar and the central bank spent tens of billions of dollars of its foreign currency reserves defending the lira while keeping interest rates at below inflation.

The lira rose 1.1 percent to 7.78 per dollar on Friday. It had slumped to a record low of 8.58 per dollar on Nov. 6.

The central bank said the required reserves of the banking system were expected to increase by approximately 12.3 billion liras ($1.6 billion) and by $5.7 billion in foreign exchange and gold as a result of the measure.

The commission rate applied to required reserves against dollar-denominated deposits was reduced to zero from 1.25 percent, the central bank said.

Last week, the central bank increased its benchmark interest rate to 15 percent from 10.25 percent to help steady the lira and rein in inflation, which stands at 11.9 percent.