Turkey: Normalizing, Central Bank to withdraw liquidity

ISTANBUL

As Turkish institutions move to reduce market volatility, the country's Central Bank will gradually withdraw the liquidity delivered to the market during the pandemic.

Central Bank governor Murat Uysal, Banking Regulation and Supervision Agency (BDDK) chairman Mehmet Ali Akben held a meeting Tuesday evening with the heads of various lenders.

At the meeting, Uysal said that during the pandemic, regulators and banks had successfully provided the market with much-needed cost-effective liquidity via rapid credit expansion, according to various sources.

He added, however, that current circumstances required steps towards normalization to protect internal and external balances.

Uysal explained that excess liquidity supplied to the market at the height of the outbreak would be gradually withdrawn without causing a liquidity deficit in the system, adding that this would increase banks' short-term funding costs.

Welcoming the Central Bank's planned liquidity steps, some participants in the meeting said these measures would increase loan and deposit rates and make Turkish lira-denominated investment instruments more attractive.

Thus, Turkish liras investors will be better protected from inflation and the appetite for the lira will increase.

Upon a request from banks for some flexibility in adapting to the asset ratio, which they said was being pulled down by increasing exchange rates, BDDK President Akben said a revision in this direction was under consideration and would be raised soon.

As some participants in the meeting said exchange and interest rates would soon balance out after some recovery thanks to strong exports and recovered production, Uysal underlined that the Central Bank did not have an exchange rate target in the floating exchange rate regime, but would take measures in case of excessive volatility.

*Written by Aysu Bicer from Ankara