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Turkey ends unpopular bond scheme in latest fiscal policy change

Turkey’s fiscal policy has reversed since President Erdogan won reelection in May, most notably with regards to interest rates.
People sit in front of a currency exchange office on July 19, 2023 in Istanbul, Turkey.

Turkey’s Central Bank ended several securities-related practices on Friday, a move that is supposed to simplify economic regulations and follows other major fiscal policy changes.

What it means: The rules compelled banks to buy Turkish government bonds as a penalty for lending at interest rates above certain limits or not meeting targets for business loans. The practice was unpopular with local and foreign investors, and resulted in little foreign interest in Turkey’s bond market, according to Bloomberg.

Forcing banks to buy bonds can crowd the market and drive up prices. When bond prices go up, the yield, or return, on the bond goes down, making it a less attractive investment to buyers. Lower yields on Turkish bonds are especially unappealing due to high inflation in Turkey.

The central bank said in a press release that the rules have been terminated in an effort to simplify policy. The institution added that it will change the practice of charging commissions on foreign currency reserve requirements in an effort to boost deposits of the lira. Further technical details will be explained in follow-up regulations, according to the central bank.

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