Higher interest rates on deposits may herald economic woes ahead
The latest data by the Central Bank shows not only the average interest rate that banks apply on deposits, but also the highest rates. The latest table shows the maximum interest rate for lira deposits is 20 percent and the top rate paid on euro and dollar accounts is 10 percent.
As noted in the title of the Central Bank’s table, “Maximum Interest Rates for Deposits in Turkish Lira Announced by Banks,” these rates are what banks are declaring as their upper limit and won’t necessarily be applied. (The same wording is used for dollar and euro accounts.) Some lenders may announce such high rates to create maneuvering space and notify the bank accordingly.
The top rates announced by lenders may in fact be 18 or 19 percent for lira deposits; others likely announce their maximum rate for foreign-exchange deposits at less than 10 percent. Also, the 20 percent maximum for lira deposits and the 10 percent rate for dollar and euro deposits are not new and have been valid for a long period now.
Rates are rising
It is understood that these maximum deposit rates, despite remaining the same, have actually reversed the trend of interest rates significantly upward. Banks would like to enlarge their deposits by applying higher rates during the reporting of their financial results. It is not surprising that rates tend to increase during such periods. However, currently banks are not in the middle of financial reporting, and deposit rates are still moving upward.
Inflation is presently near 12 percent, but the rate is expected to decline, at least marginally, in the coming months. So why are interest rates on lira deposits rising to, say, 14 or even 15 percent? In turn, rates on foreign-exchange deposits have also reached 4 or 5 percent. While those rates are offered by smaller banks, these levels have now become more fixed.
Banks don’t want to increase deposit rates and, subsequently, their costs for nothing, of course. But their need for funds is growing.
The Central Bank has increased the cost of the money it lends banks, on the one hand, and, on the other, has forced banks to use unorthodox methods to borrow. Foreign borrowing is not as plentiful as it was in the past, and even if banks could, they are warier of foreign-currency denominated bor- rowing amid volatility in the lira.
As things stand, the only way for banks to create funding is domestically by attracting deposits with higher rates.
An interest rate in line with inflation is normal. But we are about to see interest rates that are above the inflation rate. This is not a beneficial path to be on, and it should worry us. While the high rates that some banks are offering are not at the magnitude that will drive average rates higher, no one can guarantee that average rates will not rise further in the coming period.
If May and June inflation ease but interest rates move in the opposite direction, serious trouble lies ahead, and inflation will be impacted by this as well.
What is key is for inflation and interest rates to be in synch. When one of these deviates from the other, serious economic trouble becomes unavoidable. I hope we are not about to add another very significant fundamental problem to the series of ongoing economic issues.