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Emergency MPC meeting by the CBRT – March 17, 2020

100 bps cut in policy rate… CBRT convened two days before the MPC meeting on March 19, and announced a series of measures against the effects of the coronavirus epidemic. The first was a 100 bps cut in the policy rate. Thus, 1-week repo rate of 10.75% was reduced to 9.75%. Our expectation was to reduce the policy rate by 100 basis points. Central Bank in its statement emphasized the importance of healthy functioning of financial markets, credit channels and company cash flows to limit the negative impact of corona virus pandemic; however, as a reason for the interest rate cut, the Bank emphasized the inflation-limiting effect of aggregate demand conditions due to decline in international commodity prices, especially crude oil and metal prices, and weakening in global trade volume and travel restrictions.

Banks will be provided as much liquidity as needed… In addition to the policy rate cut, CBRT announced a series of measures for banks, the real sector and exporters. The measures announced for banks are as follows:

·       In addition to the weekly repo auctions held every day, the CBRT will provide additional liquidity with 91-day repo auctions when needed. Liquidity from repo auctions can be converted into depo facility where banks can lend the liquidity they acquired from repo auctions from the policy rate.

·       Open market transaction limits of primary dealer banks will be increased

·       1, 3 and 6 month maturity US dollar swap auctions will continue; auctions can also be held against Euro and gold.

·       For banks that meet the real loan growth conditions, foreign currency required reserve ratios (RRR) will be reduced by 500 basis points for all liabilities in all maturity brackets. Thus, the RRRs applicable for deposits up to 1 year will decline from to 14%, while RRRs applied to deposits longer than 1 year will be reduced from 15% to 10%. Thus, it is expected that these banks will be given US$5.1bn foreign currency and gold-denominated liquidity. The implementation will be valid starting from the liability period of March 6th and will start in the maintenance period starting on March 20th .

– It is foreseen that the total amount of opportunities to be provided to the banking sector will be limited to 25% of the funding requirement of the system.

Uninterrupted loans to the real sector… It is targeted that the banks will provide uninterrupted credit flow to the real sector from the new liquidity opportunities but new liquidity facility will be linked to the amount of credit that banks provide to the real sector. In this context;

·       Liquidity provided via 91-day repo auctions will be 150 basis points below the policy rate, i.e. 8.25%.

·       1 year TL swap auction will be held while in these swap auctions, related banks will be provided with Turkish lira liquidity against US dollars, euros and gold with an interest rate 100bps lower than 1-week repo rate, i.e. policy rate.

Ease of maturity for exporters… The CBRT took the following measures for rediscount credits, especially foreign currency earning services:

·       Up to 90 days maturity extension opportunities were granted to rediscount loan repayments that will be due between 18 March and 30 June 2020. Thus, a US$7.6bn rediscount loan repayment can be postponed.

·       A 12-month additional commitment closing period has been granted to the rediscount credits with open credit commitments and rediscount credits to be used between 18 March and 30 June 2020. Thus, the commitment closure period of these loans were increased from 24 months to 36 months.

·       As of March 20, 2020, current rediscount credit maximum terms were extended from 120 days to 240 days for short-term uses and 720 days for longer-term uses.

The real loan growth condition may make uninterrupted loans difficult for the real sector… We think that these arrangements of the CBRT are important in order to avoid liquidity shortage in the short term, but they are insufficient to prevent the loss in the real sector due to the coronavirus pandemic. The allocation of liquidity facilities to banks to the extent that they are used in the real sector is very important for the proper channeling of loans, but the fact that the companies, which are credit clients of banks that cannot achieve real credit growth, will have difficulty in accessing loans and this will reduce the effectiveness of the measures taken. Therefore, we expect the CBRT to remove this restriction if the developments continue in a negative way.

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