All Quiet on the Western Front

All Quiet on the Western Front


As of Monday, private banks have decreased their deposit interest rates by 10 points compared to the previous week. The decline in both the KKM rates and time deposits indicates that the banks have taken position prior to the Central Bank’s rate decision.

The 3-point drop in TRY/Foreign Deposit ratios at the beginning of last week has also played a part in that decline.


It is also possible that banks offering high interest rates for KKM deposits might have said that “the Treasury already covers depositors’ loss arising out of the exchange rate difference, so there is no need for us to pay high interest”. Actually, it’s a reasonable decision on the part of the banks, since they can no longer earn money from loans as deposit costs increase. As I always say, banks make more money when interest rates are low. There is no reason for them to increase deposit interest rates unless they are required to do so by law.


As far as I understand, the KKM will remain in effect until the day when the interest rate level is deemed to be “sufficient” and the exchange rates are estimated not to rise any further. Whether that day will come sooner or later depends on the Central Bank decisions and the course of macro variables such as inflation, growth, current account deficit and budget deficit. Considering the still soaring exchange rates, I could confidently say that the KKM scheme will not be terminated for a very long time.


Turkey is hitting new record highs both in budget deficit and in short-term foreign currency borrowing. Our foreign debt, which had fallen to 139 billion dollars in 2020, increased to 207 billion dollars today, and we ran a budget deficit of half a trillion lira in the first half of the year. As for our primary deficit, it is around 208 Billion TRY, which goes to show that the pressure on interest rates and foreign exchange rates will not diminish any time soon.


I do believe that the Central Bank will not let interest rates rise above 20% under the circumstances, especially due to rapidly increasing taxes. It may even be content to keep the rates at 18%.