reserve requirements

Turkey’s banking industry could be damaged unless the central bank reverses last year’s decision to stop paying interest on required reserves, the head of one of the country’s biggest lenders claims.

Suzan Sabanci, chairman of Akbank, told the Financial Times that new rules requiring banks to lodge 15 per cent of short-term lira deposits with the central bank risked fundamentally weakening banks unless they received interest in compensation. “The government is trying to be cautious that the economy doesn’t grow too fast. And I agree with that,” she said. “But we need to be recompensed. They should start paying interest in six months’ time.” Read more

Against expectations, Bank Rossii held rates on Friday, though it did raise reserve requirements. Following similar moves for February and March, Russia’s central bank raised reserve requirements by a percentage point for banks’ liabilities to non-residents (charted, right) and half a point for other liabilities. The proportions of deposits banks need to keep with the central bank now stand at 5.5 per cent and 4 per cent, respectively.

While there are signs that inflation is rising less quickly than previously, prices have still risen 3.6 per cent since the start of the year according to weekly data, making the annual 6-7 per cent target tough to achieve. Most view further rate rises as likely. Read more

Ankara has sharply raised the proportion of short-term deposits lenders must keep with the central bank, while holding policy rates steady.

Turkey’s reserve requirements differ by maturity of deposit, and the central bank’s strategy has been to tighten requirements for potentially destabilising short-term deposits, while loosening them to encourage long-term deposits. The chart, right, shows how the structure of reserve requirements has changed since the new policy began in December (dark blue line), at which point all ratios were 6 per cent. Read more

Large Chinese lenders will need to keep a fifth of their deposits with the central bank from March 25, after the People’s Bank of China announced an increase in reserve requirements. Individual banks that are lending too much might be targeted with further specific measures. Small-medium banks are probably now required to hold 16.5 per cent of loans, though, as ever, this is unclear from the Bank’s statement.

Tightening was expected – even overdue – but comments from the PBoC had suggested it might be a rate rise. This is the third rise in reserve requirements this year and follows a rate rise in February. The last raise in reserve requirements was also half a percentage point, and was announced a month ago, on February 18. Consumer price inflation held at 4.9 per cent in the year to February – the same as January, but above 4.6 per cent in December and also above forecasters’ February expectations of about 4.7 per cent. Read more

Turkey’s central bank stepped in again this week to clear confusion over the effects of its unorthodox monetary policy, after the release of data that appeared to contradict comments made by officials. The trouble was caused by balance of payments data: it showed portfolio inflows of $2.3bn in January, higher than a year earlier and at odds with official claims that some $10bn of “hot money” had left the country since December, when the central bank began “quantitative tightening” to deal with macroeconomic imbalances.

Two clarifications from the central bank have cleared up the discrepancy. The balance of payments data showed foreign investors had sold out of Turkish equities since November, while increasing their exposure to debt instruments. But the figures did not include money market transactions, mainly in the form of swap operations. Here, the central bank said, there had indeed been an outflow of $11.5bn since November. Read more

Malaysia has held rates but raised the proportion of deposits banks must keep with the central bank, as signalled by the bank. The reserve requirement will double from 1 to 2 per cent, effective April 1. The overnight policy rate remains at 2.75 per cent.

Raising the reserve requirement has become a favoured alternative to raising rates in countries wanting to tighten without attracting certain types of destabilising short-term capital inflows. Bank Negara Malaysia described the use of the reserve requirement as “pre-emptive” and “an instrument to manage liquidity and not a signal on the stance of monetary policy”. From the Bank: Read more

Inflation is beginning to slow in Russia, after one rise in bank reserve requirements in January and another one in February – the latter complete with the rate rise markets had been expecting for months.

A Reuters news flash tells us inflation slowed to 0.1 per cent in the week to February 28, bringing the price increase for the month as a whole in at 0.8 per cent, under expectations. Annual inflation has been rising steadily from a low of 5.49 per cent in July of last year, standing at 9.58 per cent at the end of January. The latest data should mean annual inflation to February fell slightly to 9.56 per cent.

Loan growth is slowing in Turkey, backing up claims by Turkey’s central bank governor that its unorthodox monetary policy is working.

Data from Turkey’s banking watchdog, BDDK, showed total banking sector loans rose 2.8 per cent to February 18. This equates to about 21 per cent over a year, well within the bank’s target 20-25 per cent loan growth. It also represents a significant drop from the annual rate of 35.6 per cent on the year to February 18. The actual annual volume of banking sector loans to February 18 was 550.3bn lira. Read more

Loan growth is losing pace and $10bn short-term capital has left Turkey since the start of its new interest rate policy in December, central bank governor Durmus Yilmaz said Friday. Despite this, the current account deficit – one of the principal targets of the measures – will continue to rise in the first quarter due to base effects. Mr Yilmaz added he did not foresee a change in policy when his governorship ends in April.

The statements add up to declaration of success – but there was a caveat. Oil prices, driven higher by events in Libya, created a “new situation”, Mr Yilmaz admitted. Turkey’s rate-cutting, reserve-requirement-raising policy has so far been possible thanks to falling inflation and fairly high unemployment. (Rate cuts in an inflationary environment would have been far more dangerous.) If oil prices were to remain high, they would create an inflation risk that might constrain Turkey’s monetary plans. For now, as long as Saudi Arabia and its oil reserves stay out of the current turmoil, many believe the oil price shock will be short-lived.

Colombia raised rates 25bp late on Friday, the first rise since the financial crisis. The move, which took markets by surprise, takes the Bank’s key intervention rate to 3.25 per cent, compared with 10 per cent before the cuts began. Colombia also said it would continue its $20m-a-day dollar purchasing programme, through which it is trying to dampen appreciation of the Colombian peso.

Peru, meanwhile, yesterday raised its reserve requirement ratio for the second time in two months. The quarter-point rise applies to sol- and dollar- denominated bank reserves and is intended “to keep inflation expectations anchored within the 1 percent to 3 percent target range,” the bank said in a statement, according to Bloomberg. Peru also raised rates in January and February, taking the key rate from 3 to 3.5 per cent since the start of the year.

High inflation has prompted the first rate rise in Russia since the financial crisis. All rates are affected by the quarter-point rise, including the deposit rate and the benchmark refinancing rate. This has surprised analysts. A Reuters poll, for example, predicted a 25bp rise in the deposit rate, with about half of respondents expecting a simultaneous rise in reserve requirements. The majority had expected the refinancing rate to be left on hold.

The rate rise, which will take the refi rate to 8 per cent, is effective February 28. Reserve requirements – raised at the end of last month – will be increased by the same amounts as last time: i.e. 1 percentage point for corporates, and 50bp for individuals and other. That move will be effective March 1. Use the dropdown below to explore historical reserve requirements (note: the most recent changes are entered by announcement date rather than effective date). Read more

The pace is picking up. China is to tighten policy again, raising reserve requirements by 50bp effective February 24. The news follows a rate rise ten days ago. The People’s Bank’s promise of “intensive adjustment” to its monetary policy in Q1 hasn’t disappointed; the last reserve requirement hike, also of 50bp, was announced on January 14. Reserve requirements for big banks are believed to be 19.5 per cent now; they are 16 per cent for smaller banks.

No reversal in Turkey. The central bank held rates at its latest policy meeting, hinting it would continue with its new monetary policy, data permitting. Since December, the Bank has been cutting rates and raising reserve requirements – a combination that they say has a tightening effect overall. Early indications suggest the policy is working.

The measures taken by the Central Bank since November are reducing macro-financial risks by leading to a more balanced growth path, mainly through a slowdown in import growth… Read more

Some small- and medium- sized deposit-taking banks will need to keep more funds with the central bank following a lending binge at the start of the year, according to reports in the official China Securities Journal.

Without citing sources or giving details, the newspaper said the People’s Bank of China had tailor-made reserve ratios for various city commercial banks, reports Reuters. Bloomberg points out that it is unclear whether the ratio has risen or fallen. Given the general move to combat inflation in China, an overall tightening is likely, however. Read more

There are international rules to govern global trade, but none to oversee foreign exchange markets or capital movements, Israel’s central bank governor has observed.

Stanley Fischer said standards for capital movements were needed, even though it was not possible to govern how much central banks could intervene in markets. Reuters news wire reports: “It is important that the IMF is now trying to develop such rules, to figure out what works and what doesn’t work when the exchange rate starts to appreciate and … what measures they can take that are acceptable from the viewpoint of managing the international economy,” he told a conference. “Those are rules we have to develop just as we developed rules gradually in the years since the 1950s that produced a global trading system,” he added.

Many countries grappling with “hot money” blame the US openly and directly, but Professor Fischer did not join them. “I believe the US is doing what needs to be done for growth. Read more

Early indications suggest Turkey’s unorthodox monetary policy is working: the maturity of deposits held at banks seems to have lengthened since December and consumer credit is falling. With a weakening lira and falling inflation, it is likely the ultimate objective – of reducing the current account deficit – is also being achieved.

So, deposit maturities. I confess I don’t have exact maturity data, but my conclusion is implied by the chart to the right. The chart shows the split of lira-denominated deposits at both private and public banks in Turkey.

The thin yellow strip represents lira deposits by non-residents and since the data do not split them further we shall ignore them for this analysis. The blue area represents “sight” deposits (i.e. like a current account, you can grab your money and run). These, then, have the minimum possible maturity (zero). The red area are “time” deposits, which are placed with the bank for a certain time. They might be a month or ten years, the data do not tell us. But they definitely have a longer maturity than sight deposits. And the proportion of sight deposits has fallen substantially since December, from 15.9 to 14.5 per cent. Read more

Russia has surprised markets by holding rates after a number of bullish hints in recent months. The central bank has, however, raised reserve requirements, joining a long list of emerging markets adopting this as their favoured tightening tool.

Bank Rossii is targeting hot money with the move: it has raised the reserve ratio more sharply for corporate non-residents than for ruble-only, individual or other types of liability. From February 1, banks will have to store 3.5 per cent of non-resident rouble and forex corporate liabilities with the central bank, a 1 percentage point increase. Other types of bank liability – such as those in roubles from individuals – will be raised half a point to 3 per cent. Use the dropdown on the chart below to explore historical reserve requirements at the Bank of Russia.

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Malaysia might be the next in a long series of central banks turning to reserve requirements. The central bank held the overnight policy rate today at 2.75 per cent for the third meeting, as expected. Inflation ran at just 2.2 per cent in the year to December.

Bank Negara Malaysia signalled, however, that it would consider tools other than rate rises to mop up excess liquidity. “Large and volatile shifts in global liquidity are leading to a build up of liquidity in the domestic financial system,” said the Bank, continuing: Read more

Incentive realignment continues at the Central Bank of Turkey. Reserve requirements have been raised as signalled last week – though by more than many will have been expecting.

Turkey is trying to lengthen the maturity of deposits flowing into the country, as it explained at the outset of its new strategy in December: “The fact that maturities of liabilities are shorter than those of assets in the Turkish banking sector exposes the sector to liquidity and interest rate risk, which increases the sensitivity of the banking system to shocks,” it said.

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Turkey’s rate cut yesterday will be followed by another raise in reserve requirements in the coming days, continuing the central bank’s plan to discourage short-duration capital flows. Bloomberg news wire reports:

The Turkish central bank’s decision to reduce the benchmark interest rate was unanimous, Turalay Kenc, a member of the Monetary Policy Committee told Bloomberg HT television. Read more