Turkey’s central bank is forcing commercial lenders to lower the interest rates they charge for consumer loans as a part of its efforts to bring borrowing costs closer to the official benchmark rate.
(Bloomberg) — Turkey’s central bank is forcing commercial lenders to lower the interest rates they charge for consumer loans as a part of its efforts to bring borrowing costs closer to the official benchmark rate.
Lenders charging compound interest rates on consumer loans between 18.56% and 20.62% will be required to park at the monetary authority lira denominated government bonds worth 20% of the new credit they create, according to a central bank circular seen by Bloomberg News.
If banks charge a higher interest rate on the loans, the amount of government bonds they should lock at the central bank should equal 90% of the credit they create, making it prohibitively expensive for banks to extend loans with higher interest rates. The changes are effective immediately.
The central bank declined to comment.
The latest measure is part of the efforts by the country’s monetary authority to cut borrowing costs as it aims to bring consumer loan rates closer to to the benchmark policy rate of 8.5%. Similar steps in 2022 contributed to a rally in Turkish bonds, with the yields on both two and 10-year local government debt tumbling.
The move likely “counterintuitively aims to cool off consumer lending, possibly to prevent pressure on the currency,” said Cagdas Dogan, research director at Tera Yatirim in Istanbul. “Banks are likely to limit supply of consumer loans at the restricted rates, which are well below their marginal cost of funding.”
The central bank’s management of loan rates since last year has left lenders facing a choice between offering cheaper credit to high-priority customers or lending at higher cost to others clients and parking large amounts of debt with the monetary authority.
Nice Credit If You Can Get It in Turkey’s Micromanaged Economy
That has left banks with little incentive to lend to second-tier clients, leading to a drop in the growth of commercial and other loans.
The weighted average interest rate on consumer loans has dropped to 24.72% from as high as 33.7% in July and is now at its lowest since December 2021, according to central bank data for the first week of March. Still, the current level is about 30% above the maximum limit of 18.558% that will be free of further requirement by commercial lenders.
(Updates in sixth, seventh and eighth paragraphs with comment and background)
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