Credit supply can be slowed down should the required reserve ratio is increased "sufficiently". The fact that such slowdown is not yet observed as shown above does not change the reality.

The Central Bank of Turkey (CBT) had increased the required reserve ratio for TL deposits with four consecutive decisions, first of which was made in September 23. The declarations of the CBT reveal that the aim of the actions was to slowdown the rapid increase in the credit volume by raising the amount of funds banks are obliged to keep at the CBT. The CBT has highlighted severally that this was required for the sake of financial stability.

The impact of the first three decisions about the required reserve ratio must already be observable. The (initial) impact of the latest decision as declared on January 24, 2011 can be traced at the credit volume figures for the period between February 18 and March 4 as per the relevant regulation on required reserve ratios. We have to wait longer to identify the complete impact of the latest decision.

Consumer loans increased by 1.4 percent over two weeks
Yesterday weekly data on the consumer loans by March 4, 2011 and on the total credits by February 25, 2011 was announced. What do the data tell us?

Let me begin with the consumer loans. The volume of the consumer loans increased by 1.4 percent in two weeks compared to February. We can identify the impact of the earlier decisions making a comparison starting with October 1, 2010. Over five months from October 1, consumer loans showed an increase by 13.1 percent. Compared to the beginning of the year (over two months) consumer loans appear to have increased by 4.1 percent.

Let us examine the total credit volume now. From February 18 to February 25, total credit volume increased by 1 percent. The rate of increase since October 1, 2010 is 16.5 percent. The rate of increase for the last two months stands at 3.8 percent.

Now it is time to pose the question: Do you observe any drop in the credit supply? Let me emphasize two points. First, we have to wait for some more to observe the impact of the latest decision. Second, the earlier decisions on the required reserve ratio are observable: they failed to reduce the rate of increase in the credit supply.

Of course credit supply can be slowed down should the required reserve ratio is increased "sufficiently". The fact that such slowdown is not yet observed as shown above does not change the reality. I have been writing on this issue for some time now not to claim that the current policy will fail to cut the credit supply. There is a much more important issue: this "sufficiently high" level of the required reserve ratio can be maintained at a reasonable level with the contributions of other public institutions (the Banking Regulation and Supervision Agency, for instance). This way the economy will not suffer unnecessary distortions. We should not miss this critical point.

This commentary was published in Radikal daily on 12.03.2011