August 22, 2022

Turkey’s central bank resorted to new measures aimed at addressing the availability of credit, including ensuring a higher reserve availability for lenders’ requirements, following shocking markets by cutting the interest rate by 100 basis points to 13 percent at its monetary policy committee meeting last Thursday.

The Central Bank of Turkey, in a statement on its website, justified the new steps by seeking to support financial stability and strengthen the cash transfer mechanism, following stressing the need to address the increasing gap between the interest rate and lending rates when it cut interest rates regarding 9 months following fixing them at the level of 14 percent.

The central bank and Turkey’s Banking Regulatory and Supervisory Authority have previously taken steps to limit loans to companies except for those whose exports are worth more than their imports, as part of an economic plan that seeks to turn a large current account deficit into a surplus.

Business associations and associations last month complained regarding the regulations and said manufacturers were unable to obtain low-interest financing. On Sunday, Turkish media quoted Timothy Ash, from BlueBay Asset Management, in a tweet via Twitter, that “the new rules of the Central Bank to reduce bank lending rates make the banking work very complicated… This will increase fears of a frantic acceleration of the economy and exacerbate Inflation increases pressure on the lira.

The Turkish lira, at the closing of the week’s trading on Friday, touched its lowest level ever at the level of 18.105 once morest the dollar, approaching the historical drop at the level of 18.4 lira to the dollar on December 20, following the central bank suddenly cut the interest rate, depending on On the unexpected influx of foreign funds from tourism revenues and the deposits of the Russian company “Rosatom” executing the “Akkuyu” nuclear power plant in Mersin, southern Turkey, amid the absence of any indications of improvement in the situation, and analysts expected the continuation of the devaluation of the lira and the rise in inflation for a longer period.

Turkey’s central bank has kept the interest rate steady at 14 percent since December 2021, following previous cuts led to a currency crisis and nearly tripled net foreign reserves since the beginning of July to $15.7 billion.

Analysts believed that this delay paved the way for the bank to take its latest steps in the path of the unconventional policy that President Recep Tayyip Erdogan insists on, who insists on reducing interest rates despite the rise in inflation to the level of 80 percent, considering that high interest is the cause and inflation is the result, contrary to theories. traditional economics. Turkish exports increased with the support of targeted low lending rates, in addition to foreign inflows from the tourism season, which is moving towards numbers before the Corona pandemic, and talk of reaching a financing agreement with Russia for the Akkuyu station in Mersin.

Archyde.com quoted analysts from J. P. Morgan said the rate cut was “an opportunity and driven by an increase in net and total foreign exchange reserves…most likely due to a combination of tourism revenue offsetting the current account deficit and dollar deposits from Russia’s Rosatom for the nuclear power plant project.” The central bank’s move to cut interest rates, despite calls by international rating institutions and experts to tighten monetary policy, came two months following Erdogan pledged to cut interest rates, despite the massive inflation to nearly 80 percent, in what experts considered a transfer of the task of stimulating the economy to the banks.

The Monetary Policy Committee, in its meeting last Thursday, chaired by the President of the Central Bank of Turkey, Shihab Caucioglu, pledged to work to strengthen the macroprudential policy group to strengthen the monetary policy transmission mechanism. She drew, in particular, to the widening of the difference between the low interest rate approved by the monetary authorities and those offered by private banks.

This situation emerged due to the sharp difference between the policy rate and interest rates in private banks in recent months, which were charging more than twice the rate of the central bank, which has remained constant since last December until the sudden cut, on Thursday. The former chief economist of the Central Bank, Hakan Kara, predicted that local banks would be encouraged through some additional budget constraints to bring their loan rates closer to deposit rates.

Kara, who is currently a professor of economics at Bilkent University in Ankara, told Bloomberg that stimulating the economy through credit is the policy that Erdogan’s government has long favored. In late 2016, the government launched the Credit Guarantee Fund, through which companies can access Government-backed borrowing, but this approach ultimately backfired as the new credit “warmed the Turkish economy and contributed to the collapse of the lira in August 2018.”

Economists expect the Turkish Banking Regulation and Supervision Agency to align with the central bank’s low interest rate policy by intervening to pressure commercial lenders for targeted easing, warning that this will reverse some of the authority’s tightening moves in recent months.