Mahfi Eğilmez explains how much bank interest 'loses' in a year!

Pointing out that bank deposit interest rates are losing value against inflation, Mahfi Eğilmez frequently repeats his warning; Eğilmez, who said, "The era of making money from money in Turkey is over," had previously drawn attention to the fact that bank interest rates cause losses against inflation by saying, "Friends, learn to do some math," regarding deposit interest rates in recent days.

In his new article addressed to citizens with savings, Eğilmez explained how bank deposits lose value against inflation in a year by calculating the real interest rates one by one.

Eğilmez stated the following in his article:

"The interest that banks give to deposit holders is the nominal interest. The word nominal means written or visible. When we say deposit interest, we understand the interest that banks plan to pay for deposits. Since the interest obtained in this way is a type of income, it is subject to income tax (withholding) when earned. The income tax withholding rate is 5 percent for accounts with a maturity of up to 6 months, and 3 percent for maturities between 6 months and 1 year. To calculate the return obtained from the nominal interest, that is, the net nominal interest, it is necessary to deduct this income tax withholding amount. If we assume that the deposit is placed for one year, the net nominal interest at the end of the maturity is calculated as follows:

Net Nominal Interest = Nominal Interest – (Nominal Interest x Income Tax Withholding Rate)

These days, the interest rate provided by banks is around 42 percent. Accordingly:

Net Nominal Interest = 0.42 – (0.42 x 0.03) = 0.4074, which is found as 40.74%.

Real interest is one of the most important factors that individuals should know when directing their savings or deciding on an investment. Real interest is interest adjusted for the effect of inflation and is calculated by subtracting the expected inflation from the net nominal interest. Expected inflation refers to the estimate made for the inflation rate at the end of the maturity. If we trust our own estimate as expected inflation, we should use it; if we want to act according to the Central Bank's estimate or the estimates that emerge in the monthly surveys conducted by the Central Bank, we should base our decision on one of them. The inflation estimates in the expectations survey that the Central Bank conducts every month with a group consisting of experts in the financial sector and the real sector can be accepted as an indicator in this regard. As of February 2024, the inflation expectation for one year later by those participating in the Central Bank survey has emerged as 37.78 percent. If we take the net nominal interest as 40.74% and the survey result as the expected inflation, we can calculate the real interest as follows:

Real Interest = [(1 + Net Nominal Interest) / (1 + Expected Inflation)] – 1

Let's put the data we mentioned above into this equation:

Real Interest = [(1 + 0.4074) / (1 + 0.3778)] - 1 = 0.02148, which is approximately 2.15%.

Accordingly, the real interest is calculated as 2.15 percent. In this case, there is a positive real interest, in other words, money is earned from deposit interest even when adjusted for inflation.

If our expectation is that inflation will remain at its current level (65%), then the real interest is found to be -14.7%. In this case, there is a negative real interest, in other words, when adjusted for inflation, the deposit interest causes us to lose money.

The interest in the real interest equation refers to the interest rate currently in effect, while expected inflation refers to the inflation level expected in the future. However, if we take the net nominal interest from a year ago and today's inflation, we can calculate the realized real interest for today. A year ago, the nominal deposit interest was around 20 percent. Its net rate after the 3 percent income tax withholding (net nominal interest rate) is 19.4%. A person who did not buy the goods and services they could have bought with their 1,000,000 TL at the beginning of the year and deposited their money in the bank at 19.4% net nominal interest means they have 1,194,000 TL in their hand today (as principal + interest). If we consider that the goods and services they could have bought for 1,000,000 TL at the beginning of the year can be purchased for 1,650,000 TL today due to 65% inflation, we can calculate that this person is at a loss of (1,650,000 – 1,194,000 =) 456,000 TL. In other words, although this person has earned interest income, their purchasing power has fallen to almost half of what it was at the beginning of the year.

The reason why the Central Bank's inflation estimates, whether its own or those obtained from surveys, are not trusted is that they have not held true in the past. For example, in the Central Bank Market Participants Survey we mentioned above, the inflation expectation for January 2024 was 30.44%, and the Central Bank's own estimate (for the end of 2023) was 22.3 percent. However, the realization was 65%. Accordingly, there seems to be a two-fold deviation between the Central Bank's estimate and the realization. Since estimates have shown such different deviations in the past, these estimates have lost their reliability. In this case, making a real interest estimate for the future with the assumption that today's inflation will remain at the same level might be a more realistic approach. Let's make such a calculation for one year later:

Real Interest = [(1 + 0.42) / (1 + 0.65)] - 1 = -0.0139, which is -13.9%.

A person who deposits money in a bank with today's interest rates will earn -13.9% negative real interest at the end of the year if the inflation rate does not change in a year. This reveals that even though they appear to have earned interest income, they will not be able to maintain their purchasing power at the beginning of the maturity."