This photo taken on August 14, 2018 shows the sign at the entrance to the headquarters of the Central Bank of Turkey in Ankara, Turkey.
Adem Altan | AFP | Getty Images
After previously signaling that the interest rate hike cycle was over, the Turkish Central Bank is choosing different monetary tightening methods to deal with rising inflation.
The agency issued a directive to lenders, effective Friday, instructing them to deposit part of their required lira reserves into frozen accounts.
This has pushed up lending rates and slashed lending limits at some banks, with some banks shrinking business loan limits to 100,000 liras ($3,100) Reuters reports Thursday.
Arda Tunca, an economist at PolitikYol in Istanbul, told CNBC: “Some banks have stopped lending. Some banks have even recalled loans that have been issued. This will lead to a further tightening of liquidity.”
“If central banks are willing to lower inflation, liquidity conditions will certainly be squeezed, but the method is critical,” he said. “If the methodology is wrong, market expectations cannot be managed.”
Indeed, Turkish bank stocks fell after the news broke on Thursday. Economic data platform Emerging Markets Watch posted on X that the central bank “took another tightening measure through reserve requirements.”
Analysts at London-based Capital Economics offered a similar view.
“New quantitative and credit tightening tools have been announced over the past month,” the firm wrote in a research note. “Last week the CBRT tightened Limiting lira loan growth, a move that could have a similar impact as a rate hike. ”
At the same time, Turkey’s foreign exchange reserves fell in January for the first time since May 2023, according to balance of payments data released this week.
Turkey’s annual consumer price inflation surged to 67.07% in February. The strong data stoked concerns that Turkey’s central bank said last month that its painful eight-month cycle of rate hikes was over and it might have to resume tightening policy.
“Pressure is growing on Turkish policymakers ahead of local elections on March 31 as capital inflows slow and foreign reserves fall again,” Capital Economics wrote. “We doubt the central bank will raise rates next week, but We are increasingly confident that there will be at least further rate hikes in the second quarter.”
—CNBC’s Dan Murphy contributed to this report.
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