Interest rates climb the more we try to tame them

Dünya Executive - - COMMENTARY -

We see once again that the economy refuses to follow orders. Whenever an official says that interest rates ought to fall or should be reduced, the more the accusation­s of an “interest rate lobby” are uttered, the more the rates stay where they are. In fact, recently they have headed in the opposite direction.

In February and March, rates on lira- and euro-denominate­d commercial debt, lira-denominate­d consumer and car loans and lira-, dollar and euro-denominate­d deposits rates all rose. Sure, there have also been some declines: Rates on dollar-denomi- nated commercial loans and on home loans have fallen.

So, why don’t rates do what they’re told? The answer to this question would be self-apparent if we could just agree on what exactly interest rates are. At its most basic, interest rates are a kind of rental fee for money. If you allow someone else to use your property, you expect to receive rent, and if you allow someone else to use your money, you expect interest in return.

The rent you can expect for a home is based on its location and its condition. The biggest determinin­g factor in what you can charge is supply and demand, and the main cause behind the change in the rent you charge from year to year is inflation. Interest rates, or the rental fee for money, will be assessed by the difficulty or ease in accessing that money, and the changes in the interest rate are determined by inflation.

We all know the recent levels of inflation, and we need to scrutinize the following detail. For any given month, when the average interest rate is being set, we don’t yet know what inflation will be. It is based on an expectatio­n made during the preceding month. A bank’s costs and profits are accounted for separately.

Don’t be surprised if rates go higher.

Now that we’re in April, we know that annual inflation rose 11.29 percent in March, moving incrementa­lly higher each month since December, when it was 8.53 percent. In January, it was 9.22 percent, and in March it was 10.13 percent. This requires lifting the rental rate for money or people simply won’t put their money in the bank. To attract resources, banks first raise rates on deposits, then reflect this on the interest they charge on loans.

Plainly speaking, this is a summary of what we’ve experience­d in the last two months. Now we are in April, and inflation appears to have risen sharply. So it should not be surprising for rate to rise further from April onward.

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