Turkey’s central bank increased the reserves banks are required to set aside for foreign exchange deposits by 2 percentage points.
The bank also reduced the amount of gold that banks can hold to cover their Turkish lira reserve requirements to 10 percent of total reserves from 15 percent, it said in a statement on Tuesday. The measures will be applied from Nov. 12.
Turkey’s embattled lira is trading near record lows after the central bank began cutting interest rates in September despite an uptick in inflation. Turks have been increasing their dollar and euro deposits at banks to help protect themselves against currency weakness since a currency crisis in 2018.
The lira’s losses are pressuring inflation. Turkey’s consumer price inflation rate rose to an annual 19.9 percent last month, the highest level in major emerging markets outside of crisis-hit Argentina. Producer price inflation accelerated to 46.3 percent.
“In line with its main objective of price stability, the central bank…revised the reserve requirement regulation to improve the effectiveness of the monetary transmission mechanism,” the bank said in Tuesday’s statement.
The changes to the required reserves will increase banks’ lira-denominated reserves by about 7.4 billion liras ($765 million). Foreign currency-denominated required reserves will increase by some $3.8 billion, the central bank said.
The central bank has cut its benchmark interest rate to 16 percent from 19 percent over the past two months, responding to demands from President Recep Tayyip Erdoğan for lower borrowing costs.
The lira was trading down 0.5 percent at 9.72 per dollar on Tuesday morning in Istanbul. It hit a record low of 9.85 per dollar in late October.
The central bank last raised the required reserve ratio for foreign exchange and gold deposits by 200 basis points on Sept. 15. Economists said that move was aimed at dissuading Turks from increasing their forex deposits and to help bolster the central bank’s own reserves of foreign currency, which are negative when subtracting liabilities.