Central bank’s new measures push overnight rates to support Turkish lira, control inflation

Ahead of the recent decisions by the Central Bank of the Republic of Türkiye (CBRT), the overnight Turkish lira (₺) interest rate had fallen to the 47-48% range, which also pulled down deposit rates. However, following the central bank’s measures, the overnight rate surged to 51%.

This increase positions the overnight rate above the policy rate, bolstering the effectiveness of monetary policy in making the Turkish lira more attractive and achieving inflation targets.

The closely watched Monetary Policy Committee meeting for May took place on May 23. As anticipated, the policy rate was held steady at 50%. However, the mandatory reserve ratios that banks must hold at the central bank were increased.

The reserve ratio for short-term deposits was raised from 8% to 12%, and from 0% to 8% for long-term deposits. These adjustments aim to absorb the excess liquidity in the system and prevent further declines in overnight and deposit interest rates.

Overnight interest rate rises

CBRT’s measures had an immediate impact. The overnight rate, 48.13% on Monday, 47.13% on Tuesday and 47.16% on Wednesday, surged to 51.02% on May 23.

This brought the overnight rate back above the 50% policy rate. This development is expected to support the monetary policy transmission mechanism, making the Turkish lira more attractive and aiding in meeting inflation targets.

Dollar exchange rate as of May 24

In the open market, the dollar starts the last trading day of the week at ₺32.23, maintaining a steady course. In the Grand Bazaar, exchange offices trade the dollar between ₺32.07 and ₺32.22. The euro is trading at a selling price of ₺34.82.

Continued decline in foreign currency deposits

Statistics for the week ending May 17 were released yesterday. Domestic residents’ foreign currency deposits decreased by 590 million dollars, dropping to the brink of 172 billion dollars.

Withdrawals from Foreign Currency Protected Deposit (KKM) accounts also continued. According to the Banking Regulation and Supervision Agency (BDDK), there was an outflow of approximately 20 billion liras from KKM last week, bringing the total size of KKM to over 2 trillion lira.

Current state of Turkish lira deposit interest rates

The steady dollar exchange rate for nearly two months and the high yield of Turkish lira deposits contribute to the dissolution of foreign currency accounts. However, last week’s data showed a notable decline in average deposit interest rates, including KKM. The 1-3 month deposit rates fell from 68.18% the previous week to 63.71% last week.

Rates offered exclusively for Turkish lira deposits dropped to as low as 49%. Following these developments, the central bank’s intervention to absorb excess liquidity is expected to support a slight increase in deposit rates.