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Turkey central bank drops reserves rule that spurred credit growth

ISTANBUL (Reuters) – Turkey’s central bank said on Friday it had scrapped a rule that nudged banks to ramp up cheap lending, in its latest step to simplify and tighten credit channels after last week’s big interest rate hike.

FILE PHOTO: A man leaves Turkey’s Central Bank headquarters in Ankara, Turkey, April 19, 2015. REUTERS/Umit Bektas

The central bank had previously linked reserve requirement ratios and remuneration rates to banks’ loan growth, which had the effect of spurring lending and economic growth.

The bank – which raised its key rate by 475 points last week – said it will now “apply the same reserve requirement ratios and remuneration rates to all banks,” adding the move should boost the effectiveness of the monetary transmission mechanism.

The financial sector’s required reserves are expected to increase by around 12.3 billion lira, and $5.7 billion in forex and gold, as a result of the revisions, the central bank said.

President Tayyip Erdogan sacked the former central bank governor earlier this month and appointed Naci Agbal, who two weeks later hiked the policy rate to 15% in the sharpest monetary tightening in more than two years.

Under the new rules, the required reserve ratio for lira deposits with a maturity of up to three months was set at 6%; those up to 6 months at 4%; those less than a year at 2%; and 1% for maturities of one year or longer.

For foreign currencies, the ratio for deposits with a maturity of less than a year was set at 19% and at 13% for maturities of one year or longer.

The remuneration rate on lira required reserves was set at 12% for all banks effective Friday, the bank said. It also decreased the commission rate applied to required reserves maintained against dollar-denominated deposits to 0% from 1.25%.

The revision in the commission and remuneration rates will lead to a decline in intermediation costs, the bank said.

The new reserve requirement ratios will take effect from the calculation date of Dec. 11, the bank said.

Along with the resignation of the finance minister and market-friendly comments from Erdogan, the moves had led to optimism among foreign investors that Turkey would adopt more orthodox economic policies.

Reporting by Ali Kucukgocmen and Nevzat Devranoglu; Editing by Tom Hogue and Jonathan Spicer

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