In a move to take the economy off the inflationary boil and strengthen the Turkish Lira the Turkish Central Bank increased the interest it charges banks to as much 12.5 percent.
The Central Bank has now decided to introduce the option to charge banks at higher interest rates to borrow money for short periods in a move to suppress inflation and strengthen the Lira.
But it is also designed to curb the growth in credit. The Governor of the bank is quoted as saying that bank credit (loans) are up by 38 percent compared to the same time last year and annual inflation is forecast to top 8 percent was above the central banks 5.5 percent target.
Whether ‘Lira’ savers will see any increase in their private bank deposits remains to be seen. It will depend on how banks structure their borrowings to cover the loans they are making to businesses and consumers.
The effect on the Lira was visible on Friday when it strengthened against worldwide currencies. The Lira was 2.81 to the British Pound as at the close of markets on Friday.
The Credit Effect
Anecdotally the effect of those bank loans and other credit facilities can be seen on the streets of Fethiye on a daily basis.
New cars, once a rare sight in Fethiye 5 years ago, have now almost driven the old cars off the road. Cheap loans and effective advertising have proven irresistible. Just look at the new car dealerships that have sprung up around town as another sign of the growth in the market.
Home loans could also be on the rise. You may not have noticed it but Fethiye has been in the midst of a mini Turkish property boom during the summer as Turks from cities outside Fethiye have flocked to buy holiday property in central areas. That has in turn triggered a new building spree of apartments.
Credit cards are also quickly replacing cash to buy fuel and food in supermarkets as bonus points and easy money. But ordinary people are also building up large expensive debts that some are finding difficult to pay off.
Turkey’s economy is expanding fast and so too is the appetite for credit both by lenders and borrowers. But that in turn is leading to prices rising fast, growing personal debt and that is what the Central Bank is trying to suppress.