Turkey brings in more macroprudential measures to force down loan rates

Turkey brings in more macroprudential measures to force down loan rates
/ bne IntelliNews
By Akin Nazli in Belgrade August 21, 2022

The Turkish central bank is introducing more macroprudential measures for loans subject to reserve requirement rules, the authority said on August 20.

With the latest move, the central bank is pushing banks to cut commercial loan rates to below the 30%-level. Meanwhile, at the same time, it wants to see the banks’ loan growth figures remain below or close to the 10%-level. Plus, it wants banks to buy more lira-denominated government papers.

(Charts: Loan-deposit rates, monthly lira loan flow, annual lira loan flow.)

Lower loan rates and government paper rates are expansionary while there is a limit applied to the growth in loans. Business will access cheap loans, but they will not be allowed to push things too far.

The reserve requirement for loans, introduced in April at 20%, will be zeroed as of September 16. However, the banks, instead, will be obliged to pledge government papers as collateral to the central bank at 30% of the loan.

If the bank cannot provide a bill on where a loan extended under exemptions provided for reserve requirement/collateral (see exemptions here) has been expended, the loan will be subject to the 30% collateral requirement.

For commercial loans, if a bank extends a loan at a cost higher than 29-30%, it will be obliged to keep government papers worth 90% of the loan at the central bank.

Thus, it is not forbidden to ask for loan rates at higher than 30%, but it is not feasible.

The interest rate levels are calculated based on the policy rate and the range will decline by 1pp when the new reference rate is calculated with the latest policy rate, which was on August 18 cut by 1pp to 13%.

Banks with a loan growth rate at higher than 10% between end-2021 and July 29 are obliged to keep the government papers at the central bank for one year.

By 2011, Turkey had a single reserve requirement ratio. Sceptics might say 2011 will come to be seen as the beginning of Turkey’s stupendous economic collapse. Monetary policy has taken its role with a growing number of comic turns, including the legendary interest rate corridor and the so-called macroprudential measures.

As Turkey dropped towards the depths of its economic imbroglio, the issue reached the point where the president's espoused 'Erdoganomics' were trying to teach us that “interest hikes actually cause inflation.”

Currently, the reserve requirement directive is a perfectly perplexing problem. Using macroprudential measures at the current exaggerated levels makes them additional non-capital controls.

The gross reserves, meanwhile, rose by around $12bn from July 29 to August 12. The source of the money was unknown. There is talk of money transfers from Russia for the Akkuyu nuclear plant being built by the Russians on Turkey's Mediterranean coast. However, what is not explained is why the government is not loudly proclaiming such a big FDI inflow or how the Russians are sending the dollars amid the Ukraine war sanctions on Moscow.

The latest moves suggest that the government wants to distribute the fresh money to “business” via “a targeted lending policy”. That might end up competing with the legendary interest rate corridor policy for meaninglessness.

There is no scarcity of progressive monetary policies in Turkey. There is, for instance, also “lira-isation.” That's also not a bad comedy, say the unbelievers.

Loan growth will be watched in the coming period, while the positive atmosphere on global markets, which emerged last month, fades away.

The USD/TRY is testing the 18.10s. Soon, “record” chorus will begin. The lates record was recorded on December 1 at 18.87.