It appears that the new policy could not fulfill its objective, yet. However, we need to see up-to-date data.
In the context of the new policy framework, the Central Bank of Turkey (CBT) last week has decided to increase the required reserve ratio for short term TL deposits. This is the sixth decision to this end since September 2010. The Bank aims to slow down the rise in the credit volume as it believes that this is needed to secure financial stability, one of the two major objectives of the bank. I have written many commentaries on this subject. The main question was this: to what extent a central bank applying inflation targeting regime can slow down the credit expansion given that the liabilities of the banks are mainly short term?
Liquidity problem
In order for the repurchase rate, the main policy tool of the CBT to ensure the price stability, to serve its purpose, it has to be close in value to the interest rate emerging from the interbank transfers. If the banking system is facing liquidity shortage, which is the case for Turkey since 2010, the CBT has to intervene for this precondition to be met. In other words, the CBT has to provide the short term liquidity banks demand.
On the other hand, during this process, banks must not be compensating for the fall in the volume of deposits to be extended as credits via borrowing from the CBT so that the objective to slow down the credit expansion by increasing the required reserve ratio can be met. But for this, the required reserve ratio must be sufficiently high and banks must consider it risky to borrow from the CBT to offset the fall in the volume of deposits that can be extended as credits.
The objective is not fulfilled yet
We can examine the latest data to see whether the threshold level for the required reserve ratio has been achieved. So, what do the figures tell? The latest data on consumer loans is dated April 15; there appears no significant change in the upwards trend. The latest data for other credits is dated April 8 and the figures are lower compared to the previous week. Is this a permanent trend? We do not know yet.
On the other hand, the amount banks borrow from the CBT to offset the fall in the volume of deposits that can be extended in form of credits tends to increase. The amount of borrowing (OMO) moves in parallel with both the amount of the required reserves deposited by banks to the CBT and the credit volume (figure 1). It appears that the new policy could not fulfill its objective, yet. However, we need to see up-to-date data to fully analyze the impacts of the major increase in required reserve ratio. In short, this subject and a similar figure will occupy this column once again in a couple of weeks.
Figure 1: Credit volume (left axis), amount of required reserve deposits and the weekly borrowing from the CBT (OMO): January 1, 2010 - March 22, 2011
(average weekly data, million liras)
This commentary was published in Radikal daily on 26.04.2011
