Credit growth rate diminished substantially in the fourth quarter, when required reserve ratio was lowered on two different interventions.

It is highlighted on all occasions that the Central Bank’s (CBT) interventions to reduce the credit growth rate brought the desired outcomes. Each and every CBT report states that reserve requirement for lira loans were increased starting with October 2010 in order to reduce the credit growth rate. The latest action to increase reserve requirement ratio was in April 2011. Starting with August 2011, international risk appetite weakened due to adverse developments in Europe. After this date the CB stopped increasing the requirements but decreased requirement ratios twice on October 6 and 27 instead.

Comparing the credit growth rates in this period with the period before October 2010, however, the picture we see does not match with the picture officials drew: credit growth rates decreased neither for consumer loans nor for total lira loans until the last quarter of 2011 whereas the latest CB intervention to increase reserve requirements took place on 21 April 2011. Besides, the intervention brought only limited increase in the required reserve ratio and did not cover all types of lira loans. The major changes in reserve requirement were introduced later by in 24 January and 23 March 2011. And more interestingly, credit growth rate diminished substantially in the fourth quarter, when required reserve ratio was lowered on two different interventions.

There are other policy instruments

Table 1 depicts the mentioned changes in credit growth. To derive quarterly credit growth figures, I used the CB’s method, i.e., I calculated the thirteen-week averages of weekly credit data. Then, again following from the CB, I annualized the growth rates compared to the previous period, which gave an “annual” growth rate for each week. The quarterly growth rates given in the table correspond to three-month averages of the rates for each week.

Insisting that the CB’s efforts to lower the credit supply proved successful is bad for healthy implementation of monetary policy. Yes, credit growth rate was eventually reduced, but not because of the CB policy, as it is clear from the table below. The figures tell us that given the circumstances facing Turkey, increasing reserve requirements is not a solution.

Of course there are other policy instruments. For instance, interest rates were raised in the late 2011 and the administration might have contacted with banks to lower the credit supply etc. But it is evident that interventions in the reserve requirements had no role in easing the credit growth.

This commentary was published in Radikal daily on 04.12.2012