CBRT Publishes New Analysis on the Relationship Between Credit and Liquidity

Experts from the Central Bank of the Republic of Turkey (CBRT) have conducted an important study examining the effects of banks' liquidity positions on credit activities. The Economic Note titled "A Perspective on the Relationship between Liquidity and Credit Channel during a Period of Abundant Liquidity" was authored by Salih Zeki Atılgan and Hüseyin Öztürk and published on the CBRT's website.

The focus of the study was to analyze how monetary transmission is affected through the credit channel. A period from January 2010 to March 2024 within the Turkish banking system was scrutinized. The analysis revealed significant findings indicating that during periods when banks' liquidity positions increased, the expected relationship between these positions and credit activities deteriorated.

Investigation of Credit Channel and Liquidity Relationship The study evaluated the impact of banks' liquidity positions on credit activities, particularly during the period from 2010 to 2024. A positive relationship was observed between liquidity position and credit activities until 2020; however, it was found that this relationship deteriorated during periods of increasing liquidity. Analyses conducted over three-year moving periods confirmed this finding.

The research results underscored the importance of banks' liquidity positions for the proper functioning of monetary transmission. It implied that to ensure the success of tight monetary policy, liquidity measures should also be included in this process. The Economic Note concluded that "the liquidity position must be at a scale that allows for transmission."

Effective Liquidity Management in Monetary Transmission The analysis specified that, as part of the fight against inflation, monetary policy should be conducted through a combination of interest rate policies suitable for economic needs and macroprudential tools. Emphasis was placed on the necessity of supporting tight monetary policy practices with effective liquidity management.

CBRT experts expressed that, in addition to the policy interest rate, the assessment of tightening liquidity measures is essential. It was indicated that this approach could lead to a more effective monetary transmission via the credit channel. Thus, it was concluded that tightening monetary policies could play a more substantial role in achieving the targeted economic constraints.