Final answer:
Higher lending rates in Turkey can encourage savings but inhibit borrowing for investments, leading to reduced economic activity. Conversely, lower borrowing rates tend to increase consumer spending and promote economic growth. However, frequent rate fluctuations create uncertainty, impacting investor confidence.
Step-by-step explanation:
Changes in the Turkish Central Bank's overnight lending and borrowing rates have significant effects on the economy. For instance, higher lending rates may encourage savings as deposit rates typically increase, attracting more funds into bank deposits. However, they tend to slow down borrowing, particularly for investments, as the cost of borrowing increases. Firms find it less attractive to finance capital expenditures, and consumers are deterred from borrowing for big-ticket items like houses and cars. This decrease in borrowing can lead to a reduction in aggregate demand and thus potentially slow economic growth.
On the other hand, lower borrowing rates generally have a stimulative effect on the economy by making it cheaper to borrow, which can boost consumer spending and stimulate economic growth. Businesses are more likely to invest in physical capital, and consumers may be more willing to finance large purchases. Yet, these effects can be variable and depend on other factors such as consumer confidence and overall economic conditions.
Moreover, if rates are fluctuating frequently, it can lead to uncertainty in the financial markets, impacting investor confidence and possibly deterring foreign investment. Stability in interest rates is often preferred as it allows businesses and consumers to plan and make long-term financial decisions.