T H E C E N T R A L B A N K’ S policy rate, which the bank decided to use to regulate the market, declaring it the real rate, still stands at 8.25%. But the weighted average cost of funding has increased to double-digits after five and a half months.
The Central Bank’s weighted average cost of funding increased to 10.15% on August 31, after reaching 10% on August 27 and 10.02% on August 28. But the policy rate stayed unchanged at 8.25%.
On paper, the rate is 8.25%, but the de facto rate rose above 10%.
The de facto rate did not reach 10% from 8.25%. The weighted average cost of funding declined to 7.34% on July 16, so this means the rate increased by almost three points in one and a half months.
If one asks, the Central Bank may very well say that it didn’t increase the rate, and that would be correct.
Also, the politicians may join the discussion and say, “Look how much we reduced the rates!”
“If you’re not living here, Turkey is a pretty fun country,” people say, more so every day. What’s happening with the interest rates is a typical indicator of the fun side of the Turkish economy.
There are so many other examples.
For instance, if we are applying a competitive foreign exchange rate now, then why do we keep selling foreign exchange to hold the rate steady?
For instance, apples and oranges, how do we compare the U.S. and Turkey, two countries with different calculation methods, on the rate of economic contraction?
CENTRAL BANK CONQUERS AND DESTROYS
The Central Bank announced in May 2018 that the policy rate is the one-week repo rate. But under the current conditions, the policy rate concept has lost its meaning because of the Central Bank, which made the ruling in the first place.
Central Bank can fund the market with a lower or a higher interest rate if the conditions require, provided that the policy rate stands at 8.25%. This has already been done in the past. But what has happened over the last year and a half makes it seem like the new methodology is permanent. The de-facto rate was increased to support the claim of no rate hikes. The market has already bought this rate hike. The interest rate on both deposits and loans has been increasing steadily.
It’s not possible to control the situation if the Central Bank can’t name the increase in the interest rate and continue to believe that this veiled increase can overcome issues.
The Central Bank is not the decision maker in the market at the moment; it follows the developments in the market and takes a position accordingly. The rate increases as the market pushes more and more. But isn’t the goal here to determine a limit and expect the market to follow it?
The graph speaks volumes
When you put the change of the Central Bank’s policy rate and the weighted average cost of funding in the first eight months of the year into a graph, the Bank’s policies during that period become clearer.
>> The Central Bank funded the market with a weighted average cost of funding rate, which is slightly above the policy rate, in the first three months.
>> The difference between the weighted average cost of funding and the policy rate increased in April when the coronavirus outbreak peaked and the Central Bank funneled cheaper resources to the market.
>> After the difference between the two rates shrank in May, it increased further in June and July. However, the side effects of overfunding the market became clearer. The Central Bank tried to find new measures after it funded the market with less and more expensive money against the increase in the interest rate.
>> The weighted average cost of funding began to increase in July. In the end, the weighted average cost of funding rose above the policy rate and reached 10.15% as of September 1.
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