As part of the government, not the state, the Central Bank of the Republic of Turkey (CBRT) announced new regulations. The regulations indicate that one more step away has been taken from the principles of free market economy.The CBRT embarked on a series of policy rate reductions as of September 2021, a fact which resulted in high-rate credit expansion. Credit expansion caused high and sudden acceleration of inflation. The CBRT ignored the fact that market dynamics would create monetary instability as a result of policy rate cuts. The heavy damage created is now being tried to be eliminated by suppressing the market with new regulations. How can a central bank not know through which policy tools it can cause monetary instability? If the CBRT knew, why didn't it take precautions? The answers to these questions are unknown. The CBRT carried Turkey to the top of the world inflation league. These are the consequences of bringing independent institutions under the control of political cadres. What is the CBRT trying to do with the new regulation under the heading of macro prudential measures? The CBRT finally stated that the “policy rate” which is the main interest rate used to fund banks and the market rates have “diverged” recently. In the previous weeks, we read in the CBRT’s quarterly inflation report about the CBRT's expectation that market rates would “converge” with the policy rate. We thought that the CBRT expected this within the framework of market dynamics. Convergence was impossible under market dynamics. However, we understand from the new regulation that it was planned to be achieved by putting pressure on the market. The new regulation applies to “some categories of commercial loans.” Loans utilized by households are outside the scope of the new regulation.As in the previous reserve requirement regulation, loans utilized by small and medium-sized firms (SMEs), micro businesses, exporters, firms in need of project finance for investments, agriculture-related firms are not covered under the new regulation. Additionally, corporate credit cards, loans extended to financial institutions and a large number of publicly-owned firms are out of the scope as well. In other words, the credit tightening concerns mainly large commercial firms. Paying attention to this credit classification is highly important to understand the potential implications of the regulation. The CBRT started imposing reserve requirements for loans previously. While reserve requirements are normally applied to deposits, they have been applied to loans as well. The required reserve ratio, which was initially 10% and then 20%, was reset with the new regulation at 0%. However, banks are now required to purchase securities instead against the commercial loans they grant at the ratio of 30%. In other words, banks do not have to deposit money in the CBRT against the loans they grant, but they have to buy securities. This time, they will have locked an additional money, not at 20%, but 30% of the loan they have extended with the obligation to buy securities. Obligation to buy securities means that banks are forced to contribute more to public sector funding. We witnessed a similar practice in the period in which the asset ratio was imposed on the banking sector. Since there is an inverse relationship between the interest and the price of a bond, banks will reduce the interest rates of government bonds by buying them. Thus, while funding itself through banks, the government will benefit from borrowing at lower interest rates. Will this be possible? Let’s continue. In case the commercial loans covered in the regulation grow by more than 10% between July 29, 2022 and December 30, 2022 in banks, the CBRT will require the related banks to keep the securities they purchase for one year. Not a month, three months or six months, but a year! In other words, the banks exceeding the threshold of 10% will forget for a very long time the securities they purchase against the loans they extend to big firms. In other words, the CBRT is telling banks "do not grow in loans granted to big companies". What has been told so far describes the practices aimed at tightening the loan amount funneling to large firms. The CBRT also intervened in credit pricing practices of banks. The CBRT offered a reference interest rate to banks as a pricing criterion. Let's not go into the details of the reference interest rate as it is too technical. The reference rate is 16.32% currently. A bank which prices its loans 1.4 times the reference rate has to buy securities equal to 20% of the loan amount in addition to the 30% mentioned above. It means that if the bank charges an interest of 22.85% or more, it is forced to buy an additional 20% of the security based on the amount of the loan. If a bank prices its loans 1.8 times the reference rate, it has to buy securities equal to 90% of the loan amount. In other words, at an interest rate of 29.38%, the burden of the loan granted by the bank increases tremendously. The CBRT is trying to prevent banks with price controls from lending at high prices in commercial loans that are within the scope of the regulation. In other words, it uses both credit amount restriction and price suppression methods simultaneously. In other words, it turns to "expansionary" and "contractionary" monetary practices at the same time. The reduction of the policy rate from 14% to 13% on August 18 is also of an expansionary nature. However, it should be emphasized that this rate reduction has practically no significance in terms of its effects on the economy since it has been detached from inflation and market interest rates. You don't need to be an economist to see the contradiction in practice. We summarize the economic environment created by the practices that have been put forward for a long time due to such contradictions with the expression "the conditions of policy absence." In the text announced, it is stated that “it has been decided that the excluded credit types will be subject to obligatory securities purchases if they are not used against expenditure.” This phrase refers to loans that are “outside the scope of the new regulation.” However, the market could not understand what the expression "against expenditure" meant. The question is: is the financial system being dragged altogether towards participation banking? Will each borrower submit a supplier invoice to the bank? So, how will the current layout be able to work without clogging? Every market in every country has customs and financing structures regardless of their quality. According to the Banking Regulation and Supervision Agency (BRSA) data dated August 12, 2022, the total loan volume of the banking system is TL6.6 trillion. The classification of loan types of the BRSA and the classifications of the CBRT regulation are different. Therefore, it is not possible to clearly distinguish the loan volume of the banking system according to the loans that are within the scope of the new regulation and those that are not. However, we know that the weight of the SME loans plays an important role in Turkey's economic structure. Looking at the BRSA data, even if we take into account only the loans granted to the SMEs, consumer loans and individual credit cards, we end up with TL2.8 trillion, or 42.81% of the total loan volume. The new regulation is not applicable for loans in these categories. There are no volume and pricing restrictions for loans in these categories. In this case, what could be the market strategy of the banks and what sort of results can the CBRT, which is responsible for ensuring monetary stability, bring in the market through the new regulation? Banks will not turn to loans on which there are both volume and price restrictions. In other words, the loans covered by the regulation are unwanted loans for banks. In this case, they will have a tendency to turn to loans that fall outside the scope of the regulation. That is, to the SMEs, tradesmen, financial institutions, exporters, etc. There is expected to be intensifying competition between banks for the loans outside the scope of the new regulation. This, in turn, can lower interest rates on those loans. However, in order not to be affected by this decline, they can encourage their customers to utilize loans with maturities of three months or more these days. Additional pricing methods may become common under some income statement items such as commissions in addition to the interest rate. The aim may be to keep the total return to be obtained from a loan at the levels before the CBRT regulation came into effect while keeping the interest rates low. It should not be forgotten that there are heavy pressures on banks in terms of the type and pricing of loans granted. All of these indicate that market dynamics are fading away. Therefore, it has become very difficult to predict what consequences new regulatory measures might have. We do not know how much credit expansion will occur in credit categories that are not covered by the regulation. However, Turkey is on the way to an election and all of her public institutions are politicized. It is unlikely that credits for the SMEs, tradesmen, exporters and farmers will be restricted. Therefore, if the competition of banks mentioned above as a possibility and credit expansion continues in these areas, how will inflation be controlled? Actually, is inflation desired to be controlled? Recovering from these days’ damages will not be easy.