The CBRT today released a Research Note prepared by Emel Satı Hacıhasanoğlu, Nursel Yavuzarslan, and Erdal Yılmaz, titled “The Impact of the Mortgage-Based Cash Flow Channel on Household Consumption (in Turkish)” The note highlights that during monetary easing cycles in Türkiye, unexpected inflation has amplified the mortgage cash-flow channel, supporting household consumption growth. According to the study, this mechanism contributed roughly 7% to private consumption in 2024, helping explain why demand remained strong despite high inflation and tighter policy measures.
Monetary policy is never just about adjusting interest rates; it is about how those changes ripple through the financial system and ultimately influence real economic activity such as consumption, investment, trade, and inflation. Economists describe these linkages as the monetary transmission mechanism. While the core framework focuses on a few classical channels, modern research also highlights additional pathways that are increasingly relevant in today’s financial landscape.
The Classical Channels
The interest rate channel is the most traditional. When a central bank lowers policy rates, borrowing costs in the economy fall. Households are more inclined to buy durable goods or housing, and firms find it cheaper to finance new projects. Higher rates do the opposite, dampening consumption and investment. This channel captures the textbook logic of monetary policy: cheaper money encourages more spending today.
The credit channel extends beyond simple borrowing costs. Monetary easing lowers banks’ funding costs and improves their balance sheets, which allows them to lend more freely. At the same time, lower interest rates raise asset values, strengthening households’ and firms’ financial positions. With stronger collateral and higher net worth, borrowers face fewer constraints. Thus, credit availability expands in good times and contracts when monetary policy tightens.
The exchange rate channel operates through cross-border capital flows. When domestic interest rates fall relative to those abroad, the local currency tends to weaken. A weaker currency makes exports more competitive and imports more expensive, boosting net exports and feeding into inflation. Conversely, higher rates attract foreign capital, strengthen the currency, and suppress inflationary pressures. This channel is especially powerful in open economies like Türkiye, where exchange rates have a fast pass-through to prices.
The asset price or wealth channel highlights the role of financial markets. Lower rates raise the present value of future cash flows, which pushes up equity and housing prices. Households that feel wealthier tend to consume more, while firms benefit from improved valuations and lower costs of equity capital. A tightening cycle reverses these effects, often triggering declines in asset markets that weigh on both household confidence and business investment.
Finally, the expectations or signaling channel underlines that monetary policy is as much about credibility as about immediate rate changes. When a central bank signals a commitment to keeping inflation under control, expectations adjust accordingly, and households and businesses plan their spending with greater confidence. Conversely, forward guidance about extended easing can anchor expectations of low borrowing costs, encouraging more aggressive investment and consumption. In this sense, central banks influence behavior not only through current rates but also through their promises about the future.
The Extended Channels
Beyond these classical mechanisms, recent research points to additional channels that are not traditionally emphasized but have become important in understanding monetary dynamics.
The cash-flow channel is one such pathway, particularly relevant in economies with high household indebtedness. Even when mortgage rates are fixed, unexpected inflation can reduce the real burden of debt payments relative to rising incomes. This frees up disposable income, which households often redirect toward consumption. Recent studies on Türkiye show that this channel has supported demand even during periods of high inflation and tight monetary conditions.
The risk-taking channel captures how persistently low interest rates encourage banks and investors to reach for yield. When safe returns are scarce, financial institutions take on riskier loans or invest in higher-yielding, but less secure, assets. This behavior can stimulate economic activity in the short run but also raises concerns about financial stability if excessive risk accumulates.
A third extension is the uncertainty or confidence channel. Monetary policy does not only change financial conditions; it also signals how policymakers perceive risks in the economy. A clear and credible easing stance can reduce uncertainty, bolster confidence, and encourage spending. On the other hand, sudden tightening or inconsistent communication can unsettle expectations, prompting households and businesses to delay major financial decisions.
A Living Framework
Taken together, these channels show that monetary policy works through a complex web of interactions rather than a single line of causation. The classical channels—interest rate, credit, exchange rate, asset prices, and expectations—remain the foundation of most analyses. Yet the extended channels—cash flow, risk-taking, and confidence—illustrate how the financial system’s evolution and country-specific conditions can reshape the transmission mechanism.
Türkiye’s Case: Which Channels Matter Most?
In Türkiye, the exchange rate channel and the cash-flow channel have been especially powerful in recent years. Exchange rate movements transmit quickly to inflation because imported goods and energy make up a large share of the consumption basket. At the same time, high inflation has unexpectedly boosted household nominal incomes, shrinking the real burden of fixed mortgage payments and freeing up cash for additional consumption. This dynamic explains why household spending has often remained resilient, even when monetary tightening or economic slowdowns would normally suggest a sharper deceleration.
The CBRT’s Note suggests that for policymakers and analysts, Türkiye’s monetary transmission cannot be understood solely through the classical interest rate lens. The interaction between exchange rate dynamics, debt structures, and inflation-driven income effects is critical. In such an environment, central bank credibility, communication, and macroprudential policies become just as important as the policy rate itself.