While withdrawal of 21.6 billion liras was targeted, the CBT injected 14.7 billion liras to the market.

The Central Bank of Turkey (CBT) increased the required reserve ratio not only by the decision taken on January 24, 2011. Decisions to this end were taken occasionally since April 2010. The first one was about the required reserve ratio imposed on foreign exchange denominated deposits. That imposed on the lira deposits was raised for all maturities for the first time in September 23, 2010. Later on November 12, 2010 the ratio was raised again for all maturities. It was declared that the impact of these two decisions would be a net exit of money of 4.2 billion liras.

These were followed by two other decisions on December 17, 2010 and January 24, 2011. The former increased the required reserve ratio for short-term lira deposits and decreased the required reserve ratio for one-year or higher maturity deposits. Furthermore, it asked banks to keep a certain amount of required reserves for repurchase transactions. Net impact was declared to be a withdrawal of 7.6 billion liras from the market. The second decision kept the required reserve ratio for long-term deposits and raised the ratio for three-month or shorter-term deposits. It was highlighted that the net impact of the decision would be withdrawal of 9.8 billion liras from the market. 

21.6 billion liras in total
In short, total amount of liquidity the CBT expected to be withdrawn from the market as of September 23, 2010 for lira deposits was 21.6 billion. The figures can be found in the announcements by the CBT.

The CBT had also explained the justification for the decisions. For instance, the announcement made on November 12, 2010 says the decision was made "taking the recent increase in credit volumes into account". By increasing the required reserve ratios, the Bank aims to slow down the increase in the credit volume by stipulating banks to keep higher amount of reserves at the CBT. The Bank has frequently declared that this was required for financial stability.

Now let us look at the other side of the coin: the CBT had injected in average 13.5 billion liras to the markets in two weeks between September 23, 2010 and October 8, 2010. The amount increased to 28.2 billion liras in average for the period between February 18, 2011 and March 4, 2011. To put it differently, in a period where withdrawal of 21.6 billion liras from the market was targeted the bank injected 14.7 billion liras to the market. 

The actual amount of injection was higher
The latest decision of the CBT aimed to withdraw 9.8 billion liras from the market. Whereas the amount of funds injected with a one-week maturity was 11.6 billion liras for the same period (the difference between the average amount injected between February 18, 2011 and March 4, 2011 and the amount injected in the week preceding February 18, 2011). In other words, the CBT injected higher amount of liquidity than that targeted with the latest required reserve ratio decision.

In order to keep the policy rate that is the backbone of the inflation targeting regime at the desired level, the CBT has to inject the liquidity demanded by the market. I believe this is clear enough. I am not discussing the legitimacy of the target to slowdown the increase in the credit supply. I take this objective as granted. But the boring figures above clearly indicate the primary prerequisite for the CBT to reach this target: 

The BRSA must step in
The CBT or another relevant institution must design a mechanism that prevents banks from extending credits using the funds injected by the CBT. This "another relevant institution" is apparently the Banking Regulation and Supervision Agency (BRSA). If such a limit is not introduced, the attempts of the CBT to withdraw liquidity from the market by raising the required reserve ratios will either prove futile or insufficient.

This commentary was published in Radikal daily on 10.03.2011