Central Bank keeps interest rate steady, consumer loan interest rates rise to 44 months peak

The Central Bank has been holding the interest rate steady for 7 months, but interest rates on consumer loans have risen to a peak of about 4 years. Before the election, the government wants the credit taps to be open, but side remedies are being sought to slow inflation, the current account deficit and exchange rate increases.

The Central Bank (CBRT) continues to keep its policy interest rate at 14 percent despite official inflation exceeding 78 percent, but there is a very different picture in loan interest rates.

According to CBRT data, the average interest rates on consumer loans increased to 35.41 percent last week, reaching a peak of 44 months. In the last three months, there has been an increase in interest rates on consumer loans by close to 800 basis points.

While these rates show weighted averages, many citizens face loan interest rates that are much higher than this rate.

Before September 2021, when interest rate cuts began, interest rates on consumer loans were at 23 percent.

On the other hand, interest rates on consumer loans, despite reaching a peak of 44 months, remain well below inflation.

HIGH RISK OF INFLATION

Commercial loan interest rates, which rose by about 900 basis points in the period of May-June, have declined in the last two weeks, falling to an average of 27.38 percent. Many companies, on the other hand, face interest rates well above this rate.

Experts point out that the divergence of the CBRT’s policy interest and loan interest rates is due to the maturity difference and the pricing of inflation risk.

Since the interest rates on consumer loans are more long-term, banks take into account the maturity risk more.

BRAKING LOANS WITH NON-INTEREST TOOLS

Although the CBRT keeps the policy interest rate constant, the government is trying to slow down the loan growth with non-interest steps, hence the increase in the current account deficit, inflation and the increase in the exchange rate.

The government wants to slow down loans with decisions such as applying mandatory provisions for loans, increasing risk weights, imposing currency exchange requirements on loans, reducing the number of installments on consumer loans, increasing the discount rate on inflation-indexed bonds by up to 50 percent.