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ISTANBUL — Turkey’s state banks are expected to cut borrowing costs on loans by around 200 basis points on Monday, according to three people with knowledge of the plan, following last week’s unexpectedly hefty rate cut by the central bank.

The three big public lenders Ziraat Bank, Halkbank and Vakif Bank are expected to lower rates on corporate, individual, mortgage and other loans, the three banking sources told Reuters, speaking under condition of anonymity because they were not authorized to discuss it.

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One lender sent an email to some staff on Friday, viewed by Reuters, notifying them of the plan to cut costs by some 200 basis points. Another senior banking source said state banks will on Monday reduce rates “significantly in order to match” the central bank’s 200-basis point cut in its repo rate.

Cemil Ertem, a chief adviser to the Turkish presidency and a Vakif Bank board member, said on Twitter that state banks had cut loan rates down to the central bank’s policy rate.

Ziraat Bank had no immediate comment. Halkbank declined to comment and a Vakif Bank spokesperson did not immediately respond to a request for comment on details of the plan.

Policy easing by a central bank typically triggers lower rates for borrowers, stimulating economic activity. But the size of last week’s rate cut to 16% shocked markets and was twice as sharp as the most dovish estimate in a Reuters poll.

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It sent the lira to a record low against the dollar and boosted benchmark yields, including a jump in Turkey’s 10-year government bond to 20.53%.

INFLATION RISK

While the big state banks are expected to follow the central bank, the market reaction last week suggests that extending cheaper loans will be costly for them. And though a sharp drop in rates could help some businesses and consumers, many analysts say it also risks https://www.reuters.com/world/middle-east/eye-polls-turkeys-erdogan-may-regret-rate-cut-he-pushed-2021-10-04 exacerbating rising inflation and lira depreciation which could soon force the central bank to reverse course and hike again.

The government’s Turkey Wealth Fund did not immediately comment on banks cutting borrowing costs. It fully owns Ziraat Bank, 75% of Halkbank and 36% of Vakif Bank, public data show.

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The central bank declined to comment on the state bank plan or on any possible fallout.

Many analysts say the central bank’s credibility is tarnished by Turkish President Tayyip Erdogan’s publicly stated calls for lower rates in order to boost credit and exports, despite inflation running near 20% last month.

Governor Sahap Kavcioglu has said publicly that Turkey’s central bank sets policy independently. Last week the bank said it cut rates in part because inflation pressure is temporary.

A self-described enemy of interest rates, Erdogan has replaced much of the central bank’s top leadership this year. Turkey is now virtually alone in cutting rates while other central banks around the world are hiking to head off rising global price pressures.

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‘RISK PERCEPTIONS’

State banks aggressively expanded credit last year to ease pandemic fallout.

But some private lenders say they are hesitant given the risks of stoking an economy expected to grow at nearly 10% this year, and possible defaults on companies’ foreign currency debt.

The chief executive of lender Isbank, Hakan Aran, said in a televised interview on Sept. 29 that credit costs will not fall unless inflation is brought down first.

“If state-run banks slash rates and turn on the consumer-lending spigot … the additional liras flooding the system will only drive more dollarisation – exacerbating financial and economic pressures,” said Emre Peker, a London-based director at Eurasia Group.

In its policy statement on Thursday, the central bank cited business’s difficulty in getting commercial loans due to tight monetary policy.

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Central bank data shows that average rates on these loans has held near 20% this year, though one of the sources said it was between 17.5% and 18% at state banks. These rates are among those that banks are expected to cut on Monday, according to the three sources.

Thursday’s rate cut was the second by the central bank in two months, following a 100-basis-point cut in September. Policy easing has sent the lira tumbling 13% against the dollar since the beginning of September, to hit an all-time low of 9.75 in early trade on Monday, pushing inflation higher via imports.

Erich Arispe, Fitch Ratings senior director who covers Turkey, told Reuters on Friday that the jump in market yields after Thursday’s rate cut shows that “risk perceptions play a role in financing conditions” for Turkey.

(Additional reporting and writing by Jonathan Spicer; Editing by Daren Butler and Susan Fenton)