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In a bid to support its local currency, Turkey tightens rules on FX deposits 

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Turkey’s central bank on Friday tightened regulations, deterring banks from holding foreign currency as the lira comes under pressure.

The decisions strengthened pre-existing rules on holding more lira in savings, one of the tools policymakers have been using to stabilize the local currency.

According to the latest changes, if a commercial lender doesn’t have 60 percent of its deposits in Turkish liras, it will be forced to park more of its foreign exchange at the central bank. This means the reserve requirement ratio for FX deposits and participation funds of up to one-year maturity has been raised from 25 percent to 30 percent.

A second regulation says lenders will have to buy seven percentage points more of local currency-denominated government bonds if their deposits fall below the 60 percent level.

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The central bank will exempt lenders from holding some lira-denominated government bonds if lira deposits make up 60 percent or more of their total deposits, the regulations published in the country’s Official Gazette said.

Broadening the use of the local currency in bank deposits is a cornerstone of the central bank’s “liraization” strategy. Banking watchdog data showed that 59.2 percent of all deposits in banks were held in liras as of March 31.

The lira has come under renewed pressure in recent weeks, with major banks like HSBC and Morgan Stanley seeing a sharp weakening after general elections next month.

Traders see the outcome of the vote as crucial in shaping Turkey’s monetary and fiscal direction after years of unorthodox policies and tight government control under President Recep Tayyip Erdogan that have led to the exodus of foreign investors.

(Story first published by Bloomberg)

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