2.2.1. Turkish Lira Liquidity Management

Through the end of 2012, relatively alleviated risks about the Eurozone through accommodative policy decisions of the ECB and more effective utilization of the Reserve Options Mechanism (ROM) reduced the need for a wider interest rate corridor. Hence, the CBRT ensured that money market interest rates hover around the lower bound of the corridor by increasing the funding amount offered to the market while narrowing the interest rate corridor through cutting overnight lending rates.

Since late 2012, accelerating capital inflows, visible credit revival and appreciation pressures on the TL have caused the CBRT to focus on macro financial risks. The CBRT has lowered short term interest rates while taking tightening steps regarding reserve requirements considering that keeping interest rates low and continuing macroprudential measures would be proper in the 1st quarter of 2013.

In the first months of 2013, the recovery in final domestic demand was healthy and export was strong despite weak global growth. The effectiveness of the ROM has been gradually increased and the overnight lending rate has been lowered due to the fact that the balancing feature of the mechanism reduces the need for a wider interest rate corridor.

Since April, in order to balance the risks to the financial stability, the level of short term interest rates has been kept lower, while macroprudential measures aiming at increasing the level of gross foreign exchange (FX) reserves have continued.

In this framework, while short term interest rates were gradually decreased in April and May, the coefficients of the reserve options mechanism were increased.

Since the end of May, the CBRT has started to apply a cautious monetary policy in response to increasing uncertainties in global monetary policies and the volatility of capital flows. In this regard, the CBRT has funded the market below the system’s funding need since June. In this month also additional monetary tightening was implemented for four days.

A measured monetary tightening was deemed necessary to contain deterioration in the pricing behavior because of the surging unprocessed food prices, the rising oil prices, and the increased exchange rate volatility and to limit the need of the loan growth hovering above the reference rate.

To maintain price stability and support financial stability, the upper limit of the corridor was increased from 6.5 percent to 7.25 percent and the interest rate on borrowing facilities provided for primary dealers via repo transactions was increased from 6 percent to 6.75 percent.

During July, the CBRT kept implementing additional monetary tightening with a view to contain the negative effects of rising inflation on the pricing behavior and announced additional monetary tightening for five days.

On 23 July 2013, the CBRT announced that there would be no funding to banks via the primary dealer repo facility on additional monetary tightening days effective from 24 July 2013. This change ensured interbank market rates to materialize around 7.75 percent during additional monetary tightening days.

To increase the effectiveness of the additional monetary tightening, the interest rate corridor was widened with an increase in the the overnight lending rate from 7.25 percent to 7.75 percent in August. In this period, the effective liquidity management provided the short term money market interest rates to materialize close to the upper bound of the interest rate corridor.

The Bank decided to increase the predictability of the Turkish lira liquidity policy starting from August to contain the repercussions of uncertainties in global monetary policies on the domestic economy.

In the third quarter of the year, the CBRT continued to provide FX liquidity to the market via FX selling auctions, which fed into the growing Turkish lira liquidity deficit in the market. The CBRT’s reduction of the share of one-week repo in total funding in this quarter led to an increase in the share of funds provided by the overnight and monthly lending facilities. Correspondingly, the CBRT’s average funding rate and the BIST Interbank O/N repo rate increased.

With respect to the prediction that inflation indicators were likely to hover above the inflation target due to the exchange rate volatility observed in the second half of 2013, in order to contain the impact of these developments on the pricing behavior, the CBRT decided to strengthen the cautious stance and reduce the volatility of money market interest rates. To this end, one month repo auctions were terminated in the Committee meeting held on 19 November 2013. Thus, interbank money market rates materialized close to the upper bound of the interest rate corridor.

On 17 December 2013, the maximum outstanding amount of the funding provided via one-week quantity repo auctions was reduced from 10 billion Turkish liras to 6 billion Turkish liras.

In addition, the total amount of funding facility offered to primary dealer banks within the framework of open market operations was reduced from 7 percent to 2 percent of the outstanding Turkish lira-denominated Treasury securities purchased from Treasury auctions. Thus, the total amount of funds available to primary dealer banks through this facility was reduced from 23.0 billion Turkish liras to approximately 6.5 billion Turkish liras.


Table 1. Decisions on Open Market Operations
  Funding Amount for Normal Days of Quantity Auctions
(TL Billion)
One-month Repo Auctions
(Upper Limit for Each Auction Amount,
TL Billion*)
22 January 2013 0.2-6.5 3.0
19 February 2013 0.2-6.5 2.5
26 March 2013 0.2-6.5 1.0
16 April 2013 0.2-6.5 1.0
16 May 2013 0.2-9.0 0.5
18 June 2013 0.2-9.0 0.5
23 July 2013 0.2-  

*One month repo auctions were terminated on 19 November 2013.