Türkiye inches closer to ‘rational’ economic policies

Ankara’s previous financial strategy put its economy under strain and sent its national currency to record lows

The Central Bank of Türkiye has simplified the country’s securities maintenance regulation, according to a statement published on the regulator’s website on Sunday.

The measure aims to streamline the existing micro- and macro-prudential framework in order to make the financial system more efficient and stable.

“As a first step in this context, the securities maintenance regulation is simplified to increase the functionality of market mechanisms and strengthen macro-financial stability. The simplification process will continue in a gradual manner in line with the principles announced by the Monetary Policy Committee,” the central bank stated.

Under the new policy, the securities maintenance ratio that regulates the foreign currency deposits of Turkish banks has been cut from 10% to 5%, effective immediately. This ratio was previously raised twice from 3% to 10% in the past two years in order to support the conversion of foreign currency deposits to lira. The recent adjustment allows banks more flexibility and liquidity.

The new regulation also imposes specific requirements on banks based on the composition of their deposits. If a bank’s ratio of lira deposits to total deposits is below 57%, it will need to increase the securities maintenance ratio by holding an additional 7% of securities. The previous threshold was 60%. If a bank boosts the share of their lira deposits to above 70%, it will get a discounted securities maintenance ratio. This adjustment aims to incentivize banks to maintain a healthier balance between lira and foreign currency deposits.

The move comes after Türkiye’s new finance minister, Mehmet Simsek, vowed to steer the country back towards “rational” policies after years of adhering to unconventional strategies, which saw inflation in Türkiye skyrocket and the lira exchange rate plunge.

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“Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving the goal of raising social welfare… Türkiye has no choice but to return to a rational basis. We will prioritize macro-financial stability,” Simsek said at a handover ceremony with his predecessor Nureddin Nebati earlier this month.

Earlier this week, in a dramatic monetary policy reversal, the central bank almost doubled Türkiye’s benchmark interest rate from 8.5% to 15%. It was the country’s first rate hike since March 2021. The regulator’s newly appointed governor, Hafize Gaye Erkan, said more tightening is likely in the coming months, until the inflation situation in Türkiye improves. It stood at 39.59% in May.

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