Ceyda Cglayan and Ebru Tuncay

ISTANBUL, (Reuters) – Turkish banks reacted in a race for lira deposits to increase their loan rates. This could surprise borrowers who were expecting to get cheaper credit, according to a bank source and a company.

Deposit rates jumped more than 20% from 17-18% one week ago. Rising funding costs drove SME loan rates up to over 30%. Bankers requesting anonymity said that these rates have been increasing in recent weeks but they increased this week.

Tayyip Erdoan announced on Monday that his government would safeguard local depositors against losses due depreciation relative to foreign currencies. It was a risky move that resulted in a sharp rally of the lira, which had fallen to record lows.

One banking source stated that “Noone wants to lose their lira deposits.” We are nearing the end of this year, and our balance sheets should be looking good. This scheme increased competition, and we have seen a rise in the deposit interest rates over the past week.

According to data from central banks, the average bank loan rate on corporate liras rose to 20.91% by Dec. 17, up from 19.63% one week prior.

Selcuk Sadir (chairman of Sadirlar Alliance), a textile firm, stated that he was waiting to invest a 30 million-euro plan in fabric manufacturing.

We need long-term loans and low interest rates. Since 1.5 months, we have been waiting. He said that he was disappointed by the increase in interest rates after the central bank reduced rates.

Sadir stated, “An appropriate interest rate is required and long-term funding are essential for investments.” Long-term maturities are not possible. “Banks tell us they are unable to quote a price. We will have to wait.”

RATE IN THE WRONG DIRECTION

Following months of slide because Erdogan’s unconventional rate cuts and fear of an inflationary spiral, Monday saw the lira plummet to 18.4 to $1.

Erdogan pressured the central bank into lowering its policy rate to 14%, despite rising inflation. As traders expected a U-turn in policy, the central bank responded by cutting bond yields and rates for corporate loans.

According to this scheme, Treasury and central banks would pay for losses on deposits that Turks make when they exchange liras or hard currencies in the new instrument.

The banks increased rates further in response to rising funding costs.

“Banks need lira deposits. Another banking source said that lira is in high demand right now. To increase their holdings, banks must make Lira deposits appealing to raise rates.

Erdogan said that Erdogan’s “new economic plan” was meant to reduce credit and increase exports.