Interest rates up
on deposits in lira

Rates rise to lock in longer terms

and for balance sheet window dressing

Banks reached a tacit agreement among themselves following the resignation of Prime Minister Saad Hariri to raise interest rates on lira deposits according to Amine Awad, General Manager at BLOM Bank.

The banks offered higher rates on deposits with tenures of more than three months and for large amounts. The intention is to encourage depositors to opt for longer term commitments.“It contributes to reducing the mismatch between the tenures of the banks’ assets and liabilities,”Awad said.

Depending on the tenure and size of the deposit, the new interest rates range from 6.75 percent to seven percent for three-month deposits to around eight percent for one-year deposits. Previous rates ranged between four and seven percent. The average rate on lira deposits and dollar deposits using the weighted average method was 5.53 percent and 3.65 percent respectively in September, according to the Central Bank.

Some bank's clients had assumed that the PM’s resignation would somehow heighten the risk on the local currency and started to convert their deposits from liras to dollars. This was on a very limited scale compared with what happened following the assassination of former Prime Minister Rafic Hariri, according to Awad.“I don’t see any real escalation in risks on the lira, it was just a matter of perception and of savers’ sentiment,” he said.

Awad said that the impact of the resignation was confined to some transfers from lira to dollar deposits locally.“To the best of my knowledge, there were no capital flights outside the country, if it has happened it must have been negligible,” he said. Another bank source estimated that the aggregate conversions to dollar from lira in the days following the resignation of Cabinet stood at $800 million.

The aim of raising the interest rate is to make lira deposits more attractive. Transfers to dollar deposits have abated in the last three to four days. “People have come to realize that it is profitable for them to hold lira deposits,” Awad said.

The spread in interest rates between lira and dollar deposits has narrowed in the past few months. This has also contributed to the need to increase rates.

Garbis Iradian, Chief Economist at the Institute of International Finance (IIF), author of ‘Here We Go Again’, a report on the impact of Hariri’s resignation, said: “The confidence in the lira will remain strong and the peg to the dollar will be maintained, supported by ample international reserves, a strong banking system, and loyal depositors from the diaspora.” According to the report, depositors’ commitment will remain strong, motivated by a deep trust in the financial system and the perceived stability of the fixed exchange rate regime.

Part of the increase in the interest rate is attributed to the banks’ window dressing of their balance sheets. Banks normally increase interest rates on both dollar and lira deposits in the last quarter of each year in order to boost their deposits. The aim is to improve their ranking in terms of deposit growth, the sources said.

Total deposits both in liras and dollars exceeded $169 billion at the end of September, up by nearly $11 billion from a year ago.