Central Bank moves to lower commercial loan rates

ANKARA

The Central Bank has announced measures that are designed to lower interest rates on commercial loans and strengthen the monetary transmission mechanism.

Reserve requirement and liquidity requirement practices involving the appropriate on and off-balance sheet items of banks and other financial institutions are among the fundamental duties and powers of the Central Bank, it said in a statement released on Aug. 20.

“In order to support financial stability and strengthen the monetary transmission mechanism, the Central Bank has been strengthening its macroprudential toolkit with reserve requirement and Turkish Lira denominated securities maintenance practices, involving both asset and liability items.”

For commercial loans to be extended until the end of 2022, securities will be maintained based on 20 percent of the loan amount to be extended at an annual compound interest rate 1.4 times higher than the Central Bank-released annual compound reference rate, and 90 percent of the loan amount to be extended at an annual compound interest rate 1.8 times higher than the Central Bank-released annual compound reference rate, the bank explained.

The bank also said that the reserve requirement maintenance being applied at a ratio of 20 percent will be replaced by the maintenance of securities at 30 percent for banks to enhance the efficiency of the practice and securities equaling the loan amount exceeding the loan growth rate of 10 percent as of Dec. 30, 2022, compared to July 29, 2022, will be maintained for a period of one year.

The recent increase in the spread between the policy rate and the loan interest rate was considered to reduce the effectiveness of monetary transmission, the bank said, referring to the statement released on Aug. 18 issued after the Monetary Policy Committee in a surprising move slashed the policy rate (one-week repo auction rate) from 14 percent to 13 percent.

After the Central Bank’s latest move on collaterals, it will be difficult for banks to offer commercial loans with interest rates above 30 percent.