Central Bank of Turkey introduces novel approach to managing excess liquidity within domestic financial system

(MENAFN) The Central Bank of Turkey has introduced a novel approach to managing excess liquidity within the domestic financial system, according to a report by Bloomberg. This new method involves the bank purchasing its local currency, the lira, through a key clearing house, marking a significant expansion in its toolkit for controlling liquidity and maintaining high interest rates.

In a document reviewed by Bloomberg, it was revealed that the Central Bank of Turkey plans to begin placing orders to buy the lira at an overnight interest rate of 47 percent. This strategy, which was implemented on Wednesday, aims to absorb excess local currency liquidity that has accumulated in the market. The document was sent to Takasbank, the Settlement and Custody Bank responsible for executing these transactions.

An unnamed source familiar with the matter confirmed the new liquidity absorption measure but declined to comment further, as they were not authorized to speak publicly. The Central Bank of Turkey has yet to provide an official statement regarding this development.

This innovative approach is part of the Central Bank's broader strategy to diversify its methods for managing domestic liquidity. Last week, Fatih Karahan, the Governor of the Central Bank, highlighted the need for such measures to address the challenges of maintaining high interest rates amidst fluctuating liquidity levels. The move aligns with the central bank's hawkish stance on controlling inflation, which has been a significant concern for the Turkish economy.

Recent official data shows that consumer price inflation in Turkey eased to 61.78 percent year-on-year in July. In response to persistent inflationary pressures, Turkish authorities have raised interest rates more than fourfold over the past year, bringing them to 50 percent. This increase has been aimed at stimulating demand for lira-denominated assets and curbing inflationary pressures.

Despite these efforts, the influx of foreign investment has led to excess liquidity in the market, contributing to a reduction in the average deposit rate. As of August 2, the average deposit rate for deposits between three weeks and three months stood at 59.1 percent, according to Bloomberg.

The Central Bank's latest intervention reflects its ongoing commitment to managing liquidity and stabilizing the economy while striving to meet its inflation targets. This innovative approach represents a proactive step in addressing the challenges faced by the Turkish financial system amid a complex economic landscape.

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