Turkey changes regulations to save lira from further falling

Turkey changed regulations on Tuesday to prevent savers from moving their money to foreign currencies and relieve pressure on the lira after ending an aggressive cycle of interest rate hikes this month, according to Bloomberg.

As part of a government-backed savings program designed to support the lira, the central bank is increasing the cost of having deposits in hard currencies for commercial lenders while lowering the mandatory reserve requirements on some accounts linked to foreign exchange.

The recent moves come after the interest rates on regular lira deposits dropped, which may have caused local savers to hunt for other options given that inflation is predicted to rise above 70 per cent in the upcoming months.

Moreover, after finishing their tightening cycle last week by raising the benchmark to 45 per cent, policymakers have been preparing further steps to ensure the transmission of rates into the economy and to encourage more savings in the local currency.

The central bank announced on its website that domestic lenders will now need to set aside additional funds for deposits and participation funds denominated in foreign currencies. An extra ratio that needs to be kept in liras for these accounts has been doubled to 8 per cent on top of the current regulations on required reserves.

Additionally, the monetary authority is reducing the mandatory ratio for FX-linked savings accounts from 30 per cent to 25 per cent for a maximum of six months. Depositors of liras can protect themselves against currency losses under the mechanism by receiving compensation guaranteed by the state for any depreciation exceeding the interest earned on their accounts.

According to economists at QNB Finansbank, the measures will partially offset each other, and the net effect will be a withdrawal of some excess liquidity from the system.