Turkish central bank is believed to have demanded lenders end FX swap deposits an unnamed banking source told BloombergHT following a meeting it held on July 5-6 with the lenders’ treasury officials. Akbank, Turkey’s third largest private lender by assets, ended FX swap deposits as of July 5, according to BloombergHT. 

Last month, Turkish Prime Minister Binali Yildirim gave the country’s lenders a last chance to ease interest rates, stating that the government will take measures if they fail to act. Turkish lenders’ weighted average interest rate on deposits with maturities up to one-month rose from as low as 8.76% in December, the lowest level since January 2015, to 10.66% in May, the highest level since July 2009, according to the latest data from the central bank. However, lenders offer higher than 15% interest rates on more than TRY1mn worth of deposits for longer than one-month maturities, Reuters reported on July 7.

Turkish banks have actually ramped up their lending since the government pledged to make TRY250bn available to businesses under the credit guarantee fund (CGF) scheme. Their total lending rose by 23% y/y to hit TRY1.86tn at the end of April. The government, however, wants the banks to support economic activity by offering cheaper loans. Its stance is widely seen as putting overt political pressure on the Central Bank of the Republic of Turkey (CBRT) to cut its rates, thus raising questions over whether the CBRT can retain its independence.

Turkish banks have for a long time been under political pressure to cut interest rates. President Recep Tayyip Erdogan has been calling on the banks to offer more loans at more affordable rates to boost economic activity. Erdogan lately renewed his attack on interest rates by saying that he sees high interest rates as a tool of exploitation: “In an environment of high interest rates, investment will stop and no new jobs will be created,” he said on June 17.

Unemployment has not fallen significantly despite the GDP expansion observed over the last two consecutive quarters. The ruling AKP wants to see higher growth and lower unemployment rates before the 2019 election. It is thus asking the banks to pump more money into the economy through loans. However, Turkish banks are also under pressure from rising funding costs generated by cuts in their ratings, rising inflation, rising deposit rates and the Turkish central bank’s implicit funding rate hikes (by forcing them to use the late liquidity window).

At the latest Monetary Policy Committee (MPC) meeting held on June 15, Turkey’s central bank kept its one-week repo (8%), overnight lending (9.25%) and borrowing (7.25%) rates on hold. The late liquidity window rate, which has been used by commercial banks for about 90% of recent funding, was maintained at 12.25%.

Turkish banks are set to see reduced profits due to lower interest margins, Huseyin Aydin, chairman of the Turkish Banking Association (TBB), warned on May 12. Also in May, pro-government daily Sabah reported that Turkish authorities were set to step in to end a potentially dangerous race among the country’s banks to attract deposits, fearing the aggressive strategy may hit the economy through higher lending costs.

Ersin Ozince, chairman of Turkey’s largest-listed lender Is Bankasi, warned on May 8 that Turkish banks’ funding costs were rising, endangering government efforts to engineer a credit boom. “Capital erosion is the most important issue in the Turkish banking industry, because capital has become the most important limited resource,” Ozince said in an interview with Bloomberg.