The deposit rates of Turkish banks, already exceeding 45%, are expected to climb further for the remainder of the year, according to bankers, as the central bank implements additional measures to tighten liquidity and lenders spruce up their year-end balance sheets.
The Central Bank of the Republic of Türkiye (CBRT) data shows the average return on three-month Turkish deposits rose to nearly 46% by Nov. 10, from 15.5% at the end of 2022. Biggest private bank Işbank CEO Hakan Aran said on Wednesday the three-month deposit rate was now above 50%.
Since President Recep Tayyip Erdoğan was reelected in May, the central bank has withdrawn some TL 1 trillion ($34.9 billion) of liquidity from the market, with the government moving toward more conventional policymaking.
Former Wall Street banker, Hafize Gaye Erkan, who was appointed central bank governor in June, has overseen 2,650 basis points of tightening and is expected to deliver another rate hike on Thursday, but at a slower pace compared to previous months.
The key interest rate is seen rising by 250 basis points to 37.5%, according to surveys. Earlier this month, the bank again promised gradual monetary tightening to achieve disinflation. It expects inflation to rise from 61.4% last month to peak at 70%-75% in May before dipping to about 36% by the end of next year.
The bank's previous policy of cutting interest rates amid high inflation was accompanied by a steep decline in lira in 2021, after which the government introduced a scheme that protects lira deposits from foreign exchange depreciation.
Excluding the KKM scheme, the share of lira deposits in the banking system has risen 7 percentage points in the last three months to above 38% amid government efforts to reduce dollarization.
However, this in turn has increased lira liquidity which at times weakens the rising trend in deposit rates, requiring the central bank 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 TL 30 billion in open market transactions in lira, with the remainder of the TL 1.7 trillion funding consisting of swap transactions in foreign currency.
The central bank has withdrawn TL 1 trillion 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%, up from 8.5% 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.