The CB is determined to take stronger steps if the rise in credit growth rate continues and tends to turn permanent.

The Central Bank (CB) Monetary Policy Committee convened last Tuesday and announced decisions after the meeting: the policy rate which has largely lost its meaning since 2011 was not changed. The upper and lower limit of the interest rate corridor was decreased by 25 basis points, while required reserve ratios were raised slightly for both lira and FX deposits.

I will not comment on the interest rate decisions. My focus will be on the changes in required reserve ratios. The decision says: “The Committee has indicated that the recent credit growth has been faster than envisaged, amid accelerating capital inflows. In order to contain the risks on financial stability …it was deemed appropriate to implement a measured tightening through reserve requirements.”

Indeed, in the recent weeks total credit volume adjusted to exchange rate movements and the volume consumer loans started to increase. Figures on the annualized rate of growth in thirteen-week average credit volume compared to the previous week – the calculation method the CB uses – shows that average credit growth in the last quarter of 2012 was 15.4 percent for overall credits and 18.8 percent for consumer loans. In the period that covers the last two weeks of December and first two weeks of January, however, average growth rates were 20.6 percent and 20 percent, respectively. Please note that the CB aims to keep credit growth rate at 15 percent.

As I stressed in recent commentaries, Turkey’s domestic savings rate is remarkably low. In this setting, the main factor that triggers rapid credit expansion is foreign capital inflows “in fashionable terms”. More frankly, the underlying cause of rapid credit growth is the hike in foreign borrowing. The gap between FX liabilities and FX earnings has been widening increasingly, almost reaching 50 percent of the GDP. Since Turkey has been unable to overcome the dependence of growth on foreign borrowing, foreign debt and related risks escalates every time growth exceeds the normal. Yet, Turkey is not satisfied with the “normal” growth rate since it is insufficient to converge with rich countries.

The BRSA might step up

Concerning possible risks, the CB’s effort to lower the pace of credit growth is but natural. But, to what degree can it achieve this objective by raising reserve requirements? I have written several times on this column between why the reserve requirement increase policy implemented between the late 2010 and April 2011 is bound to fail. I addressed indicators that proved the failure of the policy later on. But today the conditions are a little bit different. At least the CB now has a different interest rate policy. Still, the policy is unlikely to deliver results unless the Banking Supervision and Regulation Authority (BRSA) steps up and a “telephone diplomacy” process is reinitiated. Let me address this issue in another commentary.

On the other hand, this decision of the CB is just a prelude. The upwards movement in credit growth rate is not radical and the CB increased the reserve requirements only figuratively. Yet the message delivered to the banking sector is clear: the CB is determined to take stronger steps if the rise in credit growth rate continues and tends to turn permanent. Alike, if there is a commitment to control credit growth rate, we might expect supportive measures from the BRSA.

This commentary was published in Radikal daily on 24.01.2013