A photo taken on August 14, 2018 shows the logo of the Turkish Central Bank at the entrance to its headquarters in Ankara, Turkey.
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Turkey's central bank is choosing a different approach to tightening monetary policy as it faces rising inflation, having previously signaled that the cycle of raising interest rates is over.
The institution sent a directive to lenders, as of Friday, asking them to place parts of their required lira reserves in blocked accounts.
This has led to higher interest rates on loans and a reduction in the sizes of some banks' loan limits, with some lenders reducing their business loan limits to 100,000 lira, or $3,100, Reuters reported on Thursday.
“Some banks have stopped lending. Some banks are even taking back their loans already granted. This will put further pressure on liquidity,” Arda Tunca, an Istanbul-based economist at PolitikYol, told CNBC.
“If the central bank is willing to reduce inflation, liquidity conditions must certainly be reduced, but the methodology is of paramount importance,” he said. “If the methodology is wrong, market expectations cannot be managed.”
Indeed, Turkish banking stocks fell after the news on Thursday. Economic data platform Emerging Market Watch posted on X, describing the central bank as taking “another tightening step through reserve requirements.”
Analysts at London-based Capital Economics made similar observations.
“Last month, new quantitative and credit tightening tools were announced,” the company wrote in a research note. “Last week, the Turkish Central Bank tightened restrictions on lira loan growth, a move that is likely to have a similar impact to raising interest rates.”
Meanwhile, Turkey in January recorded its first monthly decline in reserves since May 2023, according to balance of payments data released this week.
Turkish annual consumer price inflation rose to 67.07% in February. The strong numbers have raised concerns that Turkey's central bank, which signaled last month that its painful eight-month interest rate hike cycle was over, may be forced to return to tightening monetary policy.
“Pressure is mounting on Turkish policymakers ahead of local elections on March 31 as capital flows slow and foreign currency reserves decline again,” Capital Economics wrote. “We doubt the central bank will raise interest rates next week, but we are growing more convinced that interest rates will be raised again at least in the second quarter.”
— CNBC's Dan Murphy contributed to this report.
