By Emre Peker 

ISTANBUL--Turkey's central bank on Saturday unveiled measures to bolster liquidity and help the country's commercial banks meet debt repayments, as Turkish policy makers take steps to counter the potential fallout from an anticipated U.S. Federal Reserve interest rate rise this year.

The Ankara-based central bank said it would raise interest rates paid on mandatory lira reserves commercial lenders park at the national bank by a total 1.5 percentage points in three installments on Sept. 1, Oct. 1 and Dec. 1. to help support core financial obligations. It also more than doubled the cap on its foreign-exchange transactions with Turkish banks to $50 billion to boost liquidity and help local lenders repay international borrowings.

Central bank Governor Erdem Basci said last month that he would start shifting from unorthodox monetary policies, such as multiple tools and interest rates, to a more simplified framework as global central banks led by the Fed start to unwinding extraordinary measures introduced since the global financial crisis.

The governor's push to simplify monetary policy comes as the Turkish lira hovers near record lows, having sunk around 25% against the dollar this year. The lira is the second worst performing emerging market currency after the Brazilian real and its weakness is derailing efforts to slow inflation to the official 5% target. Inflation has remained stubborn despite weaker energy prices--a positive for Turkey because it imports almost all of its oil and gas.

"Considering the current global and domestic circumstances, the policies need to be tight for the Turkish lira, stabilizing for the FX liquidity, and supportive for financial stability," the central bank said in the minutes of its Aug. 18 meeting, published Tuesday.

While the central bank grapples with global developments roiling international markets, such as China's economic slowdown, it is also buffeted by domestic political and security concerns, which are hurting growth.

With the first hung parliament since 2002 failing to form a coalition after June elections, the country heads to early elections on Nov. 1 amid a backdrop of escalating violence between Turkish security forces and Kurdish insurgents.

"Uncertainties in global markets and the weak course of consumer and investor confidence add to the downside risks to growth for the upcoming period," the central bankers said in the minutes of their meeting.

Saturday's moves signal an effort to get ahead of the curve before the Fed starts to normalize monetary policy.

Higher interest payments on lira reserve requirements will cut intermediation costs and support core liabilities, policy makers said. The measure is in line with a road-map unveiled Aug. 18 to simplify Turkey's monetary stance, they added.

The central bank said the move to raise the capacity of its foreign-exchange and bank notes market by about 130% to $50 billion would help local lenders repay international borrowings.

Coupled with foreign-exchange deposit allocations, foreign-currency and gold holdings parked at the central bank, and cash at their international branches, the steps "will meet more than the debt payments in the coming year," the policy makers said.

In a third step tied to a broader effort to encourage long-term deposits, the central bank said it increased mandatory reserve requirements on short-term Islamic-law compliant participation funds and foreign-exchange liabilities other than deposits.

The ratio rose to 25% from 20% for maturities up to a year, to 20% from 14% for up to two years, and to 15% from 8% for three-year liabilities. Central bankers cut requirements for maturities longer than five years to 5% from 6%.

"The published road map included measures to support the FX liquidity and to provide incentives for core liabilities and long-term borrowing," the central bank's Monetary Policy Committee said after its August meeting. "The Committee stated that the past measures on this front have already enhanced the resilience of the economy and that additional measures may further bolster these gains."

 

(END) Dow Jones Newswires

August 29, 2015 14:53 ET (18:53 GMT)

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