Mahfi Eğilmez comments on interest rate decision: 'The exact opposite happened, in reality, the interest rate...'

Former Treasury Undersecretary, economist and author Dr. Mahfi Eğilmez evaluated the Central Bank (TCMB)'s interest rate move yesterday on his personal blog.

In his article titled 'What Did the Central Bank Actually Do?', Eğilmez noted the following:

"If we exclude the late liquidity facility provided to banks to meet their temporary liquidity needs in order to prevent problems that may arise in payment systems at the end of the day, the TCMB has two practices that guide its borrowing and lending relationship with banks: overnight lending, borrowing, and lending through weekly repo auctions.

Until March 21, 2025, the TCMB was giving 41 percent interest to banks that lent their remaining liquidity surplus to it overnight in the evenings, and was applying 44 percent interest to the loans banks took from it with an overnight maturity (these rates are annual rates; to find the overnight interest, this rate must be divided by 365). The range formed between these two is called the interest rate corridor. Until a month ago, the TCMB was not using the overnight lending practice, but was only ensuring that the movement occurred between these two interest rates (as lower and upper limits) in lending through weekly repo auctions.

The TCMB's main lending facility, lending through weekly repo auctions, works unilaterally only in the direction of lending; in other words, the TCMB does not borrow from banks on a weekly basis. The interest rate the TCMB applies to the loans it provides in this way is called the policy rate. This is the main interest rate through which the TCMB directs market interest rates. For example, when you enter the list of central bank interest rates in the world, this rate appears. As of March 21, the policy rate was 42.5 percent (this rate is an annual rate; to find the weekly interest, this rate must be divided by 52). The TCMB conducts its lending practice in this way, allowing the 42.5 percent policy rate, which is taken as the starting point, to form within the interest rate corridor (between 41 and 44 percent).

The TCMB Monetary Policy Committee announced in an extraordinary meeting on March 21 that it left the overnight lending rate at 41 percent, raised the lending rate to 46 percent, suspended lending through weekly repo auctions, and made the overnight lending practice the main practice. Thus, by raising the lending rate to 46 percent, the TCMB shelved the 42.5 percent rate known to the world as the policy rate and made the 46 percent overnight interest a kind of policy rate. However, in world lists, the TCMB interest rate continued to remain at 42.5 percent.

I criticized this issue, writing that trying to appear as if it had not raised interest rates to others would cause the TCMB to lose credibility, and I persistently advocated for a return to the weekly repo auction practice and for its interest rate to be raised to 46 percent.

The TCMB Monetary Policy Committee, at its meeting on April 18, raised the overnight borrowing rate to 44.50 percent and the overnight lending rate to 49.00 percent. Thus, it both moved the interest rate corridor to a higher level and widened its range. Most importantly, at the same meeting, it raised the weekly repo auction lending rate to 46 percent. As far as I understand from this regulation, the TCMB has abandoned the overnight lending practice and returned to the weekly repo auction lending practice, which is the main lending practice. As soon as the TCMB announced this decision, the TCMB policy rate was corrected to 46 percent in world lists. In other words, the difference between appearance and reality has been eliminated.

Many commentators wrote and interpreted that the TCMB raised interest rates, whereas the exact opposite happened. While the TCMB was using overnight lending and applying 46 percent interest to it, after this decision, it will switch to lending through weekly repo auctions and start applying 46 percent interest. At first glance, it seems as if the interest rate has not changed and only the name of the practice has changed. However, in reality, there was a slight decrease in the interest rate. Because 46 percent overnight interest is higher than 46 percent weekly interest when calculated as an annual compound.

However, one should not expect this very small decrease in the interest rate to affect the banks' interest rates.

In my opinion, the TCMB should continue its practice with the lending method whose interest rate it has announced as the policy rate. Changing the method every now and then to appear as if it has not changed the interest rate does not gain credibility for the TCMB, but on the contrary, causes it to lose it. Because not making surprises, announcing the changes it will make in advance, and providing forward guidance are among the basic rules of monetary policy. Therefore, with this latest regulation, a return to the right path has been made."

News Source: 12punto