2.2 Operational Framework of Monetary Policy

2.2.1 Turkish Lira Liquidity Management

At the beginning of 2024, the FNS pointed to a liquidity shortage of TRY 1,012 billion, whereas the excess liquidity, which became permanent since September 2024, stood at TRY 302 billion on December 31, 2024. This excess liquidity was sterilized through net open market operations (OMO) of TRY 250 billion and sell-side Turkish lira currency/gold swap auctions (reverse swap) of TRY 52 billion (Chart 2.2.1.1).

In 2024, the TRY 1,314 billion decline in the FNS was primarily driven by the improvement in the CBRT’s net FX position. The change in the volume of banknotes in circulation and reserve requirement regulations as well as the change in the amount of net domestic borrowing of the Ministry of Treasury and Finance of the Republic of Türkiye were the factors that increased the funding need of the system.

In 2024, excess liquidity was sterilized using a diverse set of tools to enhance the effectiveness of the monetary transmission mechanism.

Accordingly,

• Excess liquidity was permanently sterilized through reserve requirement measures.
• In the first half of the year, the excess liquidity was sterilized through Turkish lira deposit buying auctions and quotation at the BIST Repo/Reverse Repo Market, the BIST Committed Transactions Market (CTM), and the CBRT’s Interbank Money Market (IMM).
• In the second half of the year, a diversified set of tools was gradually put into use, and the CBRT started to conduct Turkish lira deposit buying auctions at different maturities between 1.45 p.m. and 2.15 p.m., in addition to Turkish lira deposit buying auctions conducted between 11.00 a.m. and 11.30 a.m. Moreover, the excess liquidity was sterilized through sell-side Turkish lira currency/gold swap auctions and quotation at the Takasbank Money Market (TMM).

In order to maintain instrument diversity and operational flexibility in liquidity management, the CBRT is required to hold a sufficient amount of GDDS and Turkish lira-denominated lease certificates issued by the Undersecretariat of Treasury Asset Leasing Company Ministry of Treasury and Finance (HMVKŞ) in its OMO portfolio. In accordance with this requirement, nominal TRY 9 billion of lease certificates were added to the portfolio through the auctions in 2024. Thus, the size of the OMO portfolio was nominal TRY 174.3 billion as of December 20, 2024, composed of lease certificates of nominal TRY 9.2 billion and GDDS of nominal TRY 165.1 billion.

2.2.2 Foreign Exchange Liquidity Management

The floating exchange rate regime continued in 2024, and exchange rates were determined under free market conditions according to supply and demand balance. In addition, the CBRT has no commitment to any exchange rate level under the current exchange rate regime. However, to ensure efficient functioning of the FX market and promote healthy price formation, the CBRT continued to closely monitor exchange rate developments and related risk factors, as well as to take the necessary measures and employ suitable instruments.

To contribute to banks’ Turkish lira and FX liquidity management, the CBRT continued to conduct buy-side swap auctions (where the CBRT buys FX/gold at the settlement date) via the traditional method as well as buy-side swap market transactions via the quotation method in the first half of 2024. On the other hand, during the process of gradually reducing the CBRT’s swap transaction amount as stated in the Monetary Policy for 2024, buy-side Turkish lira currency/gold swap auctions ceased starting from May. Similarly, limits for swap transactions via the quotation method were reduced gradually, and Turkish Lira Gold Swap Market transactions were terminated in June, while Gold FX Swap Market and Turkish Lira Currency Swap Market transactions were terminated in July. Accordingly, the outstanding amount of buy-side swaps, which increased to USD 58.5 billion in March from USD 47.7 billion in early 2024, was reduced to zero by the end of July.

Upon the accumulation of excess liquidity in the system, the CBRT started to conduct sell-side Turkish lira FX swap auctions (where the CBRT sells FX at the settlement date) via the traditional method in August, and sell-side Turkish lira gold swap auctions (where the CBRT sells gold at the settlement date) in October, with a view to diversifying the sterilization toolset. As of December 31, 2024, there were no sell-side Turkish lira currency swap auctions via the traditional auction method, and the outstanding amount of sell-side Turkish lira gold swap auctions was 17.6 tons.

Turkish lira-settled FX forward selling transactions were carried out at the CBRT in March 2024, but no new transactions were conducted afterwards, and thus, the CBRT’s total short position amount was reduced to zero in June.

In 2024, the CBRT continued to buy gold produced from ore against Turkish lira to accumulate reserves and conducted location swap transactions with banks in line with market conditions.

In 2024, in tandem with the developments in global interest rates, the interest rate applied to collateral FX deposits was gradually decreased from 5.50% to 4.50% for the US dollar, and from 4.00% to 3.25% for the euro, across all maturities. The interest rates applied to FX deposits that banks can borrow from the CBRT were gradually lowered from 7.75% to 7.00% for one-week and from 8.50% to 7.75% for one-month maturity for the US dollar, and from 6.00% to 5.50% for one-week and from 6.50% to 6.00% for one-month maturity for the euro.

2.2.3 Reserve Requirements and Securities Maintenance

In the first half of 2024, the CBRT took comprehensive steps to simplify the macroprudential policy framework to enhance the functionality of the market mechanism and strengthen macro-financial stability. Following the reduction of the securities maintenance ratio for foreign exchange liabilities and the termination of the implementation regarding securities maintenance based on loan growth in the first quarter of 2024, all regulations involving a securities maintenance requirement were terminated on May 9, 2024, which was the most prominent simplification step. The additional reserve requirement maintenance based on the leverage ratio was terminated on June 28, 2024.

Reserve requirements (RR) continued to be used as a macroprudential tool to support the monetary policy, in order to strengthen the monetary transmission mechanism, increase the share of Turkish lira deposits, support the transition from FX-protected deposits to Turkish lira deposits, and ensure that loan growth is in line with the disinflation path. Moreover, excess liquidity in the financial system was sterilized through various instruments, including reserve requirements.

In 2024, the reserve requirement ratios for Turkish lira liabilities and KKM accounts were increased. In addition to the commission practice implemented in line with the targets related to the transition from KKM accounts to Turkish lira time deposits and renewals, the CBRT decided to apply remuneration to banks’ required reserves for Turkish lira deposits and KKM accounts every three months in line with the aforementioned targets, as of February 4, 2024.

Regarding FX RR ratios, the additional reserve requirement ratio for FX-denominated deposits maintained in Turkish lira was increased by 400 basis points from 4% to 8% across all maturities as of January 19, 2024. This ratio was subsequently reduced to 5% as of September 13, 2024, and to 4% as of November 22, 2024. On the other hand, the exemption from the RR ratio for the increase in FX items, which are provided directly from abroad and qualify as external funding, was narrowed and extended for one year.

As part of the selective credit and quantitative tightening steps taken to support the monetary tightening process, the CBRT introduced a loan growth-based RR practice effective as of March 7, 2024, and a 2% growth limit for each of Turkish lira commercial, general-purpose, and vehicle loans, which prevented fluctuations in loan demand. In addition to the monthly growth limit for Turkish lira loans, the financial conditions were further tightened by introducing a monthly growth limit to FX loans extended as of May 25, 2024, as well, with the aim of ensuring a level of loan growth consistent with the disinflation path and maintaining the share of Turkish lira loans. The monthly loan growth limit for FX loans was decreased from 2% to 1.5% on July 20, 2024.

The scope of the exemption from loan growth was reevaluated throughout the year. In July, investment loans that were extended in the scope of the funding provided by international development finance institutions were exempted from loan growth limits. To mitigate the negative effects of the earthquake that occurred on February 6, 2023, and to contribute to the recovery, the duration of the exemption for loans extended to the earthquake zone was prolonged from June 28, 2024, to January 3, 2025.

As of the calculation date of December 20, 2024, the average weighted TRY and FX reserve requirement ratios were 16.7% and 22.8%, respectively (Charts 2.2.3.1 and 2.2.3.2).

As of the calculation date of December 20, 2024, TRY liabilities subject to reserve requirements amounted to TRY 12,379 billion, and FX liabilities amounted to TRY 10,389 billion. As of the maintenance period of January 3, 2025, USD 56.00 billion worth of FX and USD 10.40 billion worth of gold have been maintained for FX liabilities. As of the maintenance period of January 3, 2025, the amount of additional RR required to be maintained in TRY for FX deposits/participation funds (excluding deposits/participation funds of banks abroad and precious metal deposit accounts) is TRY 187.70 billion (Charts 2.2.3.3 and 2.2.3.4). On the other hand, the maintained amount based on Turkish lira loan growth is TRY 6.90 billion, while the maintained amount based on FX loan growth is TRY 0.80 billion.

2.2.4 Rediscount Credits

Governed by Article 45 of the CBRT Law, rediscount credits for exports and FX earning services are extended to exporters and firms that engage in FX earning services and activities to finance them at affordable costs. These loans are made available at maturities of up to 360 days by accepting Turkish lira and FX-denominated bills for rediscount via intermediary banks based on the Turkish lira equivalent of the bills. Repayments to the CBRT are made in either FX or Turkish lira, depending on the currency of the issued bills.

The total limit for rediscount credits was set at TRY 600 billion for Turkish lira-denominated credits and USD 3.30 billion for FX-denominated credits.

Firm-based credit limits were determined as: for Small and Medium-Sized Enterprises (SMEs), half the maximum annual net sales revenues or financial balance sheet amounts set for micro, small, and medium-sized enterprises in subparagraphs (a), (b), and (c) of the first paragraph of Article 5 of the “Regulation on Small and Medium-Sized Enterprises” published in the Official Gazette of May 25, 2023 and No. 32201, TRY 4.5 billion for firms engaged in FX earning services, export intermediaries and firms operating in the defense industry, and TRY 2.5 billion for other firms.

In 2024, the following changes were made in the rediscount credit implementation:

• The CBRT decided to grant an additional three months to the export commitment fulfillment period for rediscount credits for export and FX earning services extended between January 1, 2021 and May 6, 2024 (including these dates) to companies that faced difficulties in fulfilling their export commitments due to Türkiye’s decision to impose export and import restrictions against Israel as of May 23, 2024, and the resulting disruptions in logistics activities in the Suez Canal.
• As of July 1, 2024, the minimum rate of FX selling obligation for Turkish lira rediscount credits, which were extended under Additional Articles 1 and 2 of the Implementation Instructions on Rediscount Credits for Export and FX Earning Services, was reduced from 40% to 30%. Additionally, the CBRT decided to exempt FX purchases to be made up to 10% of the sales amounts, provided that they are not on the same day as the FX sale made within the scope of the Communiqué on Supporting the Conversion of Firms’ Foreign Exchange Obtained From Abroad Into Turkish Liras No. 2023/5, and the FX purchases made with the balance at the end of the maturity period of the conversion and participation accounts, but the purchase transaction of which is canceled or resold to an intermediary bank within five business days, in determining the commitments made not to buy FX while using said credits.
• As of July 8, 2024, rediscount credits used by Turkish Armed Forces Foundation (TAFF) companies and their subsidiaries are not subject to export proceeds FX selling commitment.
• As of July 17, 2024, rediscount credits extended to defense industry companies against bills issued in FX due between August 1, 2024 and May 31, 2025 were given the option to be extended up to 360 days.
• As of September 9, 2024, the following three exemptions have been introduced to the firms’ commitments not to buy FX for all Turkish lira loans:
• FX purchases equivalent to a maximum of USD 50 thousand made during the commitment period
• FX purchases sold within five business days after the purchase
• FX purchases made with the balance at the end of the maturity period of the conversion and participation accounts
• On October 8, 2024, the reference interest rate for rediscount credits was updated as the CME Term SOFR rate calculated based on the secured overnight financing rates (SOFR) by CME Group for USD-denominated transactions, instead of the London Interbank Offered Rate (LIBOR), as LIBOR interest rates were no longer announced as of September 30, 2024.
• As of December 26, 2024, the CBRT amended the discount rate calculation method for rediscount credits. The interest cost of rediscount credits will be a ratio of the policy rate. Accordingly, the new interest cost of rediscount credits will be applied as 29.93%.

In 2024, a total of TRY 580.58 billion of rediscount credits for export and FX earning services were extended with a breakdown of TRY 74.18 billion in FX and TRY 506.40 billion in Turkish lira.

With the amendment of August 12, 2024 to the Implementation Instruction on Rediscount Credits Stemming From the Currency Swap Agreement, which is another rediscount credit implementation, the two rediscount credit implementations were harmonized. Accordingly, the CBRT switched from the physical submission of bills to CBRT branches to storing the bills at an intermediary bank on behalf of the CBRT and transmitting electronic copies of the bills to the CBRT as part of the rediscount credits stemming from the currency swap agreements.

In 2024, rediscount credits originating from currency swap agreements amounting to approximately CNY 2.35 billion (USD 326.36 million) were extended in local currency to finance trade or investment activities between the Republic of Türkiye and the People’s Republic of China; and approximately UAE 99.90 million (USD 27.19 million) were extended in local currency to finance trade or investment activities between the Republic of Türkiye and the United Arab Emirates (UAE).

2.2.5 Advance Loans

Advance Loans Against Investment Commitment (ALAIC) are extended pursuant to Article 45 of the CBRT Law through intermediary banks to firms for financing large-scale, high-tech, and strategic investments by accepting TRY-denominated bills for advance, at a maximum maturity of 10 years and with a maximum grace period of two years. The ALAIC program has been allocated an annual limit of TRY 100 billion.

By December 2024, the following changes were made in the ALAIC implementation:

• As of May 17, 2024, it was decided to set the minimum score for the Technology and Strategy Score (TSS), which is given by the Ministry of Industry and Technology of the Republic of Türkiye, at 70 points, and that investment projects that fall below this threshold would not be eligible for loans.
• As of November 11, 2024, the calculation method of interest/profit share rates applied in credit/financing transactions were updated. Accordingly, the base rate will be either 30% or 70% of the CBRT policy rate – whichever is the lower – and the interest/profit share rate to be applied after discounts will be at least 10%.

In 2024, TRY 11.97 billion was used out of the total loan allocation of TRY 20.87 billion in advance loans against investment commitments to investing firms through banks.