(Bloomberg) --

Turkey will boost the share of lira deposits in its banking system with policies intended to diversify savings away from foreign currencies such as the US dollar, the central bank said in an annual policy statement on Friday.

The monetary authority said its top priority is to broaden the use of liras by increasing its share in bank deposits to 60% during the first half of 2023 from around 35% a year earlier. 

The national average is now 55% and the bank has in the last two months rewarded lenders that are above the 50% mark by foregoing some commissions imposed on the industry.

Turkey Moves On From Steep Rate Cuts With Pause to End Year (1)

The Monetary Policy and Liraization Strategy for 2023 shows regulators will pursue a policy mix that encourages residents to save in liras and banks to hold longer-term government bonds denominated in the local currency. That framework allowed the central bank to lower borrowing costs despite rampant inflation, while commercial lenders warned of risks to their capital from the low-yield government debt that they are required to hold.

Below are some of the highlights from the document posted on the central bank’s website:

  • Open Market Operations known as OMO will become the “fundamental” funding tool for the central bank next year, while the share of currency swaps in lira funding will decline. The one-week repo rate will remain the main policy tool.
  • The size of OMO will make up as much as 7% of the central bank’s balance sheet, up from the 5% ceiling this year, likely pushing commercial lenders to buy more lira bonds with longer maturities.
  • The official inflation target remains 5%, and Turkey will keep its floating exchange rate regime.
  • The bank will continue to seek new foreign-currency swap agreements with global peers.

The lira was little changed after the statement and it was trading 0.1% lower at 18.7213 per dollar at 11:46 a.m. in Istanbul.

--With assistance from Ugur Yilmaz, Baris Balci and Kerim Karakaya.

©2022 Bloomberg L.P.