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Turkish deposit rates to rise as liquidity tightens

Turkey's central bank governor Hafize Gaye Erkan said the current policy rate will be maintained until the monthly inflation rate falls significantly Reuters
“Our economic programme has started to bear fruit,” said former central bank governor, Hafize Gaye Erkan, in a post on X

Turkish banks’ deposit rates, already above 45 percent, are expected to continue rising for the remainder of 2023 as the central bank takes additional steps to tighten liquidity and lenders spruce up their year-end balance sheets.

Central bank data shows the average return on three-month lira deposits rose to near 46 percent by November 10 from 15.5 percent at the end of 2022. Isbank CEO Hakan Aran said on Wednesday the three-month deposit rate was now above 50 percent.

Since Turkish President Tayyip Erdogan was re-elected in May the central bank has withdrawn some 1 trillion lira ($34.9 billion) of liquidity from the market, with the government moving towards greater economic orthodoxy in a policy U-turn.

Former Wall Street banker Hafize Gaye Erkan, who was appointed central bank governor in June, has overseen 2,650 basis-points of tightening with another rate rise expected on Thursday.

The bank’s previous policy of cutting interest rates despite high inflation triggered a currency crisis in 2021, after which the government introduced a scheme that protects lira deposits from forex depreciation.

Excluding the KKM scheme, the share of lira deposits in the banking system has risen seven percentage points in the last three months to above 38 percent amid government efforts to reduce dollarisation.

However, this in turn has increased lira liquidity which at times weakens the rising trend in deposit rates, requiring the central bank (CBRT) to step in.

“There is a possibility of excess liquidity in the interbank repo market again because of CBRT foreign exchange purchases,” QNB Finansbank said, pointing also to increased swap funding and a decrease in Treasury lira deposits at the central bank.

“In order to balance this, additional liquidity measures may be taken at the MPC meeting,” the QNB report said, referring to the central bank’s monetary policy committee meeting on Thursday.

The central bank’s current funding structure consists of only 30 billion lira in open market transactions in lira, with the remainder of the 1.7 trillion lira funding consisting of swap transactions in foreign currency.

The central bank has withdrawn 1 trillion lira from the market since the May elections by increasing banks’ required reserves and is expected to continue with such steps.

Deposit rates are also expected to rise as a result of the central bank’s interest rate hikes, with its policy rate currently standing at 35 percent, up from 8.5 percent in May.

Banks’ efforts to boost the appearance of their balance sheets at year-end are another factor expected to push deposit rates higher.

“As the end of the year approaches, balance sheet window dressing will also be effective. Therefore, deposit interest rates may go even higher,” one banker said.