Turkey Tightens Screws on Credit Boom With New Lending Rules

(Bloomberg) -- Turkey’s central bank has rolled out new measures to curb credit-card spending and limit loans to some industries as it leans on backdoor tightening to get a grip on inflation without crashing the economy.

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Days after a second interest-rate hike that fell short of expectations, policymakers announced rule changes that will make it more costly for consumers to use credit cards for cash withdrawals. The central bank is also imposing a stricter growth limit on car loans and some commercial credit, according to its announcement on Tuesday.

Export and investment loans, among a few others, will be exempt from the restrictions. The central bank described the steps on credit-card use as part of an effort to “control inflation and balance domestic demand.”

The challenge for Turkey is how to cool off inflation that’s still near 40% but keep credit flowing to parts of the $900 billion economy with local elections less than a year away. As a cost-of-living crisis consumed Turkey last year, credit-card spending surged to a record as an alternative to borrowing from banks at much higher rates.

What Bloomberg Economics Says...

“We expect the Central Bank of the Republic of Turkey’s updated plans to support monetary tightening via alternative tools to result in higher lending rates. That’s good news, as it translates to further tightening and could help reverse the anomaly of lending rates falling behind deposit rates. The bad news is that the restrictive steps are non-transparent compared with an increase in the policy rate.”

— Selva Bahar Baziki, economist. Click here to read more.

Under new Governor Hafize Gaye Erkan, the central bank has raised official borrowing costs by 9 percentage points while also opting to deliver some monetary tightening by way of alternative measures. Its benchmark rate is now at 17.5%, still deeply negative when adjusted for prices.

Bloomberg Economics now estimates that consumer inflation will end the year at 55%, compared with its earlier call of 47%.

Erkan will present her first inflation report on Thursday, when she’s expected to make significant upward revisions to the central bank’s forecasts. Its current year-end inflation projection is 22.3%.

Finance Minister Mehmet Simsek described the latest measures as being “in line with the aim of improving our country’s balance of payments, reducing public deficits and reducing inflation.”

Simsek — who, like Erkan, is a Wall Street veteran — said on Twitter that Turkey “will continue to channel our limited resources to exports and investments.”

(Updates with comment from Bloomberg Economics)