Turkish Prime Minister Binali Yildirim has given the country’s lenders a last chance to ease interest rates, stating that the government will take measures if they fail to act, Reuters reported on June 22.

The government wants the banks to support economic activity by offering cheaper loans. Its stance is, however, widely seen as putting overt political pressure on the Central Bank of the Republic of Turkey to cut its rates, thus raising questions over whether the CBRT can retain its independence.

“I am making the last call before the train leaves: either you adopt a reasonable interest rate or we will take measures,” Yildirim was reported as telling the banks. “Our bankers should not regard this as a threat – we have instruments at our disposal.”

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.

Erdogan, who has even declared himself “an enemy of interest rates”, on June 17 once again attacked high rates. “We will continue to intervene in interest rates,” he declared. Erdogan was probably suggesting by that that he would continue to criticise the central bank’s policies. “In an environment of high interest rates, investment will stop and no new jobs will be created,” he added.

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 is also anxious about unemployment. It 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 jobless 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 last month, 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.