Bank Inflation Expectations, Risk Premia and Lending Behavior

This paper investigates the impact of banks’ medium-term inflation expectations on credit supply in a major emerging market. Theoretically, higher inflation expectations can either expand credit via the Fisher effect or contract it through a risk premium channel. By linking novel survey data on banks’ macroeconomic expectations with micro-level credit records in Türkiye (2009–2019), our findings suggest that the risk-premium channel dominates. Within-firm estimations show that an increase in a bank’s inflation expectation leads to a contraction in domestic currency credit supply. These results are robust to instrumental-variable estimations and an event-study design centered on the 2018 exchange rate shock. Beyond credit volumes, higher expectations lead to elevated interest rates and tighter collateral requirements. This contraction is most pronounced for small, highly leveraged, and domestically focused firms, with adverse spillovers to investment, productivity, and export performance via firm-bank relationships.