Turkey’s president, Recep Tayyip Erdogan, has hiked the banking and insurance transaction tax (BSMV) on consumer loans to 15% from 10%, according to a presidential decree published in the Official Gazette.

Recently, the government hiked wages paid to public servants and payments to pensioners while sharp tax hikes were also delivered via an omnibus bill. The omnibus law became effective on July 15, when it was published in the Official Gazette.

Turkey is currently going through a gradual monetary tightening and normalisation process, the central bank said on June 22, when it hiked its policy rate by 650bp to 15% at the first monetary policy committee (MPC) led by new governor Hafize Gaye Erkan.

The fiscal tightening led by new finance minister Mehmet Simsek is proceeding on a more “front-loaded” track rather than “gradual”. The government may have decided to tighten its grip by the end of 2023 and deliver relief in the new year, prior to the local polls to be held in March.

In parallel with the tightening process, weighted average interest rates imposed on new commercial loans jumped to 24% as of July 7 from 15% two weeks ago.

Story chart: Lira loan and deposit rates.

The average consumer loan rate hit 48% as of July 7 while the average vehicle loan rate reached 41% and the average mortgage rate rose to 28%.

The average lira deposit rate with maturities up to three months retreated to 38% as of July 7 after hitting 42% on June 23.

Turkey’s official consumer price index (CPI) inflation stood at 38% y/y in June versus 40% y/y in May, the Turkish Statistical Institute (TUIK, or TurkStat) said on July 5.

In the same period that the sharp rises were observed in loan rates, loan growth stopped. The total lira loans volume in the balance sheet of Turkey’s banking industry remained flat at TRY 6.7 trillion as of July 7 compared to June 23.

The vehicle loans and housing loans volumes also remained flat in the same period at TRY 83bn and TRY 439bn, respectively.

Credit card debt also stayed flat at TRY 787bn while personal finance loans volume rose to TRY 870bn as of July 7 from TRY 860bn as of June 23.

The latest 5pp tax hike is related to the personal finance loans.

Chart: Despite the latest stabilisation, net lira loans volume rose by TRY 1.6 trillion as of July 7 compared to end-2022. In 2022, a record TRY 2.3 trillion was registered in net lira loans growth.