Central Bank decision challenges uncertainity

Turkey’s Central Bank will announce a floor for its weekly lira funding every other Friday, in an attempt to give clearer signals for the markets and improve liquidity management of banks.

The bank will pre-announce a minimum amount of its weekly repo auctions at the benchmark interest rate of 5.75 percent, Gov. Erdem Başçı said yesterday at a conference on targeting inflation in Istanbul.

“The banking system demands more than 35 billion liras Başçı said yesterday. “We will provide at least 20 billion liras at a one-week rate of 5.75 percent. The rest will be borrowed from the Central Bank through overnight operations. The message we are sending is that we will not lend below 20 billion liras. As a result uncertainty is lowered.”

Başçı said this implied the Central Bank would not provide less than 20 billion liras for the coming two weeks. The governor said they could change the minimum amount in the coming weeks in accordance with market conditions.

This new measure will help normalize the increase in loans in the country by limiting risks, Başçı said. It will also provide incentives for banks heavily dependent on inter-bank markets or for those that have borrowed excessively from the Central Bank or in secondary markets to meet their debt payment deadlines, he said.

The system’s liquidity distribution will also be more balanced and the banks heavily bound to secondary markets will gradually normalize, the governor said.

Regarding criticism that there is no sufficient liquidity of U.S. dollars in the market, Başçı said, “Banks are not that troubled regarding the dollar currently,” adding that Turkish banks are providing 33 percent of their reserve requirements in U.S. dollars, from the 40 percent the Central Bank allows. “This implies they can do it easily. ... We can say there are no foreign exchange liquidity concerns in the [Turkish] banking system.”

Başçı also commented on a recent slowdown in the loan growth in Turkey, saying it was the result of successful combination of two policy tools: control on lending rates to banks and the increase in their reserve requirements.

The average loan growth in the past 10 days has fallen below 10 percent, according to Başçı, who said, “If the slowdown in loan growth continues varying around 10 percent, we can easily reach our inflation and other targets by the year-end, and will be much more comfortable regarding risks for 2012.”