Turkish Central Bank to pay interest on lira reserves to support growth

ISTANBUL - Reuters

The Central Bank said on its website that the rate of interest it pays on lira reserves in November and December will equal the weighted average cost of Central Bank funding minus 700 basis points.

Turkey’s Central Bank said on Oct. 21 it will begin paying interest on financial institutions’ required lira reserves from November, in a bid to support growth and domestic savings.

The Bank said earlier this year that it may take such a step to boost liquidity in the financial system and help counter any economic slowdown. It stopped paying interest on lira reserves in 2010, when Turkey was flooded with cheap funding that threatened to overheat its economy.

The Central Bank said on its website that the rate of interest it pays on lira reserves in November and December will equal the weighted average cost of Central Bank funding minus 700 basis points.

The average cost of funding stood at 8.26 percent as of Oct. 20.

“The Central Bank ... will provide further support to core liabilities in order to spur balanced growth and domestic savings," the Bank said in a statement. “The Central Bank will remunerate the Turkish lira component of required reserves of financial institutions.”

From January, the interest rate for each quarter will be set as the weighted average cost of the Central Bank funding minus either 500 or 700 basis points, depending on their ratio of deposits and equity to loans.

Turkish government officials have recently warned that tensions in Iraq and Syria, as well as Ukraine, combined with slower growth in Europe could hit the economy, putting pressure on the Central Bank to cut rates and support growth.

The government earlier this month slashed its growth estimates and raised its inflation forecast for 2014 and 2015.