A central bank transforming into a river of money.

Decoding Monetary Policy: Are Central Banks Saying One Thing and Doing Another?

Jordan Keane in Business & Economy August 2025 • 4 min read.

"A deep dive into how effective interest rates, not just official announcements, truly shape economies. Discover the hidden signals banks are watching."

In today's complex financial world, deciphering the signals from central banks can feel like trying to read a secret language. While official policy announcements often grab headlines, a growing body of research suggests that what central banks do might speak louder than what they say. This article explores the fascinating world of monetary transmission, focusing on how 'effective' interest rates – those subtly shaped by central bank actions – can have a surprisingly powerful impact on the economy.

For years, economists have understood that central banks influence economic activity by setting key interest rates. These rates, in turn, ripple through the financial system, affecting borrowing costs for businesses and consumers alike. However, in the wake of the 2008 financial crisis, many central banks adopted unconventional policies like quantitative easing, leading to a divergence between officially announced rates and the rates actually prevailing in money markets.

Now, a groundbreaking study focusing on Turkey is shedding new light on this phenomenon. This research suggests that when official policy rates and 'effective' rates diverge, it's the latter that truly drive lending and deposit behavior. Prepare to dive deep into the world of interest rates, capital flows, and the hidden signals that banks are really watching.

Effective vs. Official Rates: What's the Real Story?

A central bank transforming into a river of money.

The study leverages a unique period in Turkish monetary policy (2011-2014) where the central bank deliberately allowed policy rates to diverge from interbank rates as a way to manage capital flows. Think of it like this: the central bank had multiple levers to pull, not just one. This created a fascinating opportunity for researchers to untangle the effects of different interest rate measures.

The key question: which rates really matter for banks when they're setting loan and deposit rates? The researchers used bank-level data to investigate the relationship between various short-term interest rate measures and actual bank behavior. The findings were striking:

Interbank rates are more relevant: When official and effective rates diverge, interbank rates become the key driver of monetary policy transmission.
Loans and deposits are priced accordingly: Interbank rates play a critical role in determining the prices of loans and deposits.
Official rates take a backseat: Once interbank rates are accounted for, the officially announced rates lose their significance.

In essence, the study reveals that banks are paying closer attention to the actual cost of funds in the market, rather than simply following the central bank's stated policy rate. This has profound implications for how we understand monetary policy, especially in an era of unconventional tools.

The Big Picture: Rethinking How We See Monetary Policy

This research from Turkey offers valuable lessons for understanding monetary policy in a world where central banks are increasingly using unconventional tools. It highlights the importance of looking beyond official announcements and paying attention to the subtle ways central banks influence market conditions. As the global economy continues to evolve, a deeper understanding of these 'effective' interest rates will be crucial for investors, businesses, and anyone trying to navigate the financial landscape.

About this Article -

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Everything You Need To Know

What's the main difference between 'effective' and official interest rates, and why does it matter?

The key difference lies in how these rates are formed and how they influence the financial system. Official interest rates are those explicitly announced by the central bank. Effective interest rates, in contrast, reflect the actual prevailing rates in the market, especially in the interbank market. The study focusing on Turkey showed that when the central bank allowed the official rates to diverge from interbank rates, the effective or interbank rates became the primary driver of lending and deposit behavior. This divergence is important because it reveals that banks respond more to the real cost of funds than to the central bank's announcements. This has significant implications for understanding how monetary policy actually works, especially in times of unconventional monetary policies like quantitative easing.

How did the study in Turkey help to uncover the importance of 'effective' interest rates?

The study used a unique period (2011-2014) in Turkish monetary policy where the central bank intentionally allowed its official policy rates to differ from interbank rates to manage capital flows. This situation provided a perfect case study to examine which rates banks considered when setting their loan and deposit rates. By analyzing bank-level data, researchers were able to see the correlation between various short-term interest rates and actual bank behaviors. The findings demonstrated that interbank rates, a key component of effective rates, were more influential than the officially announced rates in shaping bank lending and deposit pricing, thus highlighting the significance of effective rates.

What are the practical implications of the research findings for businesses and investors?

The findings suggest that both businesses and investors need to look beyond the central bank's official announcements to understand monetary policy's real impact. If interbank rates, part of the 'effective' rate, are the true drivers of financial activity, businesses should focus on the costs of borrowing in the interbank market, which affects loan pricing. For investors, this means analyzing the real-time interest rates in the market, and how these interbank rates are affected by central bank actions (or inactions). A deeper understanding of effective rates will be crucial for investment decisions, as it provides a more realistic picture of the financial landscape than simply relying on official announcements.

Can you explain how interbank rates influence the pricing of loans and deposits?

Interbank rates represent the cost at which banks lend to each other overnight. These rates, a part of 'effective' rates, are critical because they directly reflect the actual cost of funds in the market. When setting loan rates, banks incorporate their own funding costs. If the interbank rates are high, banks will likely increase their loan rates to cover their costs. Conversely, when interbank rates are low, banks can offer lower loan rates. The same logic applies to deposits; banks use interbank rates as a reference to determine how much interest they can pay on deposits, reflecting the real market cost of borrowing and lending. This mechanism highlights the importance of the 'effective' rates as a true reflection of monetary transmission.

How does this study help us understand monetary policy in an era of unconventional tools, and what are the lessons learned?

This study offers valuable insights in an environment where central banks use tools beyond setting official interest rates, such as quantitative easing. The main lesson is that the focus should shift from merely looking at official policy announcements to analyzing the subtle ways central banks influence market conditions, particularly through the 'effective' rates. It demonstrates that interbank rates, a crucial component of effective rates, can be more influential than officially announced rates. This shift in perspective is vital for accurately assessing monetary policy's impacts in a world where central banks are constantly innovating and adapting their strategies. It underscores the need for financial market participants to adopt a more nuanced and detailed view of how central banks operate.