Lira’s losses prompt Turkey’s central bank to tinker with required reserves

As Turkey’s embattled lira is trading near record lows, central bank tends to tinker with required reserves.

Turkish central bank began cutting interest rates in September despite an uptick in inflation and increased the reserves banks are required to set aside for foreign exchange deposits by 2 percentage points.

In a statement, the bank also announced reducing the amount of gold that banks can hold to cover their Turkish lira reserve requirements to 10 percent of total reserves from 15 percent, . The measures will be applied from Nov. 12, said the statement.

"In line with its main objective of price stability, the central bank...revised the reserve requirement regulation to improve the effectiveness of monetary transmission mechanism," it said.

Economists said that move was aimed at dissuading Turks from increasing their forex deposits and to help bolster the central bank’s own reserves of foreign currency, which are negative when subtracting liabilities.

Turks have been increasing their dollar and euro deposits at banks to help protect themselves against currency weakness since a currency crisis in 2018.

The lira’s losses are pressuring inflation. Turkey’s consumer price inflation rate rose to an annual 19.9 percent last month, the highest level in major emerging markets outside of crisis-hit Argentina. Producer price inflation accelerated to 46.3 percent.

The central bank has cut its benchmark interest rate to 16 percent from 19 percent over the past two months, responding to demands from President Recep Tayyip Erdoğan for lower borrowing costs.