(Bloomberg) --

Turkey’s push for faster credit growth is inadvertently eroding returns on lira savings, a consequence of pro-growth policies that officials fear might fuel demand for dollars.

The government last month set ambitious targets for banks to boost lending and mitigate the economic fallout from the coronavirus pandemic.

But instead of rolling out new loans, some private lenders began aggressive cuts to interest rates on deposits after the banking regulator said they must raise a newly defined asset ratio to above 100%. Policy makers are now concerned lower rates might result in a rush for more dollars and create another source of imbalance as they try to stimulate the $750 billion economy, according to officials with direct knowledge of the matter.

Sudden changes in saving patterns can act as a destabilizer for emerging economies such as Turkey, where more than half the savings in the banking sector is already denominated in foreign currencies. Additional demand for foreign exchange could present a particular challenge at a time of declining reserves, which is putting pressure on the currency and amplifying the burden on companies holding foreign debt.

Central bank data on deposits underscore officials’ growing concern. Following the new regulation, the average rate lenders offer for lira accounts dropped to 8.4%, the lowest level since November 2013, according to most recent data.

The drop was driven by private lenders, where lira deposits fell 3.4% within the first 3 weeks of the new asset-ratio requirement. State banks saw their local-currency deposits rise 7.9% during the same period as they chased credit growth more aggressively.

Deposit rates well below consumer inflation are only one factor among many that determine how much foreign exchange Turks might want to hold. But lower rates for a sustained period might eventually force savers to buy more dollars, according to the officials, who asked for anonymity to discuss policy makers’ concerns.

Officials at the regulator and the treasury declined to comment.

President Recep Tayyip Erdogan and Treasury and Finance Minister Berat Albayrak have repeatedly slammed private banks for failing to support companies even before the coronavirus outbreak paralyzed economic activity. With the economy likely falling into a recession, the focus remains on credit even at the risk of growing vulnerabilities elsewhere.

©2020 Bloomberg L.P.