Turkey’s Central Bank Eases Interest Rate Caps for Banks, Boosting Lending Prospects

===========================================================

The Turkish central bank has rolled back its penalties for banks that breach interest rate caps of 1.8 times the policy rate, a move seen as positive for Turkey’s banking sector.

Background

The interest rate caps were introduced last year and required banks to buy Turkish government bonds if they breached the cap. This had been a major pain point for Turkish banks, which have struggled with low lending rates and additional regulations on deposits.

Struggles of Turkish Banks

Low Lending Rates and Deposit Regulations

Under the previous rules, banks were required to hold a certain proportion of lira deposits to FX deposits, making it difficult for them to fund higher rates needed to attract deposits. This has led to a restrictive banking sector, dominated by state banks in recent years.

Easing of Regulations

The easing of these regulations could give Turkey’s privately-owned banks a better chance of rebuilding their market share. Akbank, one of Turkey’s largest private lenders, welcomed the change and announced that it had refinanced a dual-tranche facility from international investors at a lower rate than last year.

Positive Impact

Refinancing at Lower Rates

This is a significant improvement compared to its October 2022 refinancing, which was priced at higher rates. The easing of regulations has given Turkey’s banks some breathing room and a chance to rebuild their market share.

Cautionary Note

While the easing of regulations is seen as positive for the sector, many remain cautious due to President Recep Tayyip Erdogan’s historic preference for low interest rates. The new economic team will need to maintain this approach in order to boost confidence in the sector.

Risk of Return to Low Interest Rates

Influence of Upcoming Municipal Elections

The upcoming municipal elections in March will be closely watched by the financial community, as they could influence the government’s policy decisions, particularly on interest rates. With Erdogan’s June election victory based on a platform that promised to keep interest rates in single figures, there is a risk that the government may return to more voter-friendly policies if the opposition gains ground in the elections.

Conclusion

For now, the easing of regulations has given Turkey’s banks some breathing room and a chance to rebuild their market share. However, the sector remains cautious due to the lingering uncertainty surrounding interest rates and the government’s economic policy decisions.