Central bank to address Turkish lira liquidity surplus amid falling interest rates

In recent days, markets have been closely monitoring the Central Bank’s decisions due to the surplus of Turkish lira (₺) liquidity, which has led to a decline in overnight and deposit interest rates. No rate hike is expected at Thursday’s (May 23) Monetary Policy Committee (MPC) meeting, with the Central Bank of the Republic of Türkiye (CBRT) anticipated to keep the policy rate steady at 50%.

However, additional measures might be implemented to prevent a further decline in deposit interest rates – which have contributed significantly to reducing dollarization, accelerating the transition to Turkish lira, promoting savings, and consequently aiding in inflation control.

Dollar exchange rate on May 23

The CBRT’s May MPC meeting will be held today, with the decision to be announced at 2:00 p.m. In the open market, the dollar is trading at ₺ 32.19 and remains stable. In currency exchange offices, the buying and selling range for the dollar is between ₺32.08 and ₺32.18.

Current status of overnight interest rates

The CBRT has significantly increased its foreign exchange reserves in recent weeks. Particularly after the Turkish local elections, net reserves, excluding swaps, have recovered by over $50 billion, partly due to the rise in gold prices.

However, the CBRT’s purchase of foreign currency in exchange for Turkish lira has led to an abundance of Turkish lira liquidity in the market. On Tuesday, this surplus exceeded ₺460 billion, reaching the highest levels in four months. Consequently, overnight rates fell to the 47-48% range, below the policy rate.

Current status of deposit interest rates

Recent CBRT data indicated that deposit interest rates have remained stable at around 68% for the past four weeks. However, the rates for FX-Converted KKM accounts are also included in this calculation. For savers with only Turkish lira, recent offerings have been around the 50% mark, or even below for smaller amounts.

What is liquidity surplus?

A liquidity surplus occurs when cash is abundant in the system. This excess liquidity reduces the need for financial institutions to seek more funds, leading to a decline in overnight and deposit interest rates.

Currently, both Turkish lira deposit rates and overnight rates falling below the policy rate diminish the transmission power of the Central Bank’s monetary policy.

What is the Central Bank’s next move?

Banking sources recall that the Central Bank has been holding repo auctions to reduce Turkish lira liquidity in the system. They suggest that an increase in reserve requirement ratios could be a measure to absorb some of the excess liquidity. Currently, these ratios range between 15-25%.

Additionally, more effective liquidity sterilization could be achieved by conducting longer-term repo auctions. The interest rate corridor could also be widened to a higher range.

These measures are expected to help manage the liquidity surplus and stabilize the interest rates.