Turkish interest rates on business loans dive after central bank action

Turkish banks have slashed interest rates on commercial loans after the central bank introduced measures to coerce them into lending at lower cost.

The average interest rate on a business loan, excluding overdraft facilities, fell to below 22 percent in the week ending Aug. 26 from 25.9 percent a week earlier and 31.3 percent on July 22, according to the latest central bank data.

Turkey’s central bank cut its benchmark interest rate to 13 percent from 14 percent on Aug. 18, saying there were signs economic growth was slowing. The move shocked investors, who pointed to consumer price inflation, which accelerated to 79.6 percent in July. Inflation climbed to 80.2 percent in August, according to official data published on Monday.

On Aug. 20, the central bank required banks who failed to keep interest rates on business loans closer to the benchmark interest rate to deposit more capital in the form of lira bonds with the monetary authority. Banks asking for interest rates on new loans exceeding the central bank’s annual compound reference rate by 1.4 times would be required to lockup bonds worth 20 percent of the new credits’ value. The ratio rose to 90 percent for loans costs exceeding 1.8 times the reference rate.

Turkish President Recep Tayyip Erdoğan, who has sacked three central bank governors since the summer of 2019, has based his government’s economic programme on boosting economic growth through production, investment and exports. He must call presidential and parliamentary elections for June next year at the latest amid a slump in living standards caused by inflation and a weaker lira.

In contrast to business loans, interest rates on consumer loans have dropped only marginally since late July. Average rates stood at 33.9 percent in the week to Aug. 26 compared with 34.1 percent on July 22, the central bank data showed. The government is concerned that lower rates on consumer loans will stoke demand for imported goods and further widen the current account deficit, pressuring the value of the lira.

Unorthodox monetary and economic policy in Turkey has led to a flight of foreign and local capital from the lira. The lira lost 44 percent of its value against the dollar last year and is down about 27 percent in 2022. It was trading little changed at 18.22 per dollar on Monday.

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