Erdem Başçı

Dr. Erdem Başçı

The CBRT has significantly bolstered the financial and macroeconomic stability by contributing to the economic rebalancing in Turkey with the policies it has implemented over the past two years.


The global economic developments suggest that the effects of the 2008-2009 financial crisis still persist. Even though it has been four years since the onset of the crisis and despite the expansionary monetary policies adopted by the central banks of advanced economies in the wake of the crisis, the deleveraging process in both firms and households still continues in advanced economies, and the recovery in economic activity has not yet reached the desired level. Meanwhile, expansionary monetary policies have had notable effects on emerging economies, including Turkey. In this period, increased volatility in risk appetite and short-term capital flows accompanied by the growing awareness regarding financial stability have urged central banks to seek alternative policies. In this context, CBRT has put well-designed macroprudential policy instruments into use, and adopted policies that support the idea of achieving stability in capital flows without resorting to capital controls. With the amendment to the Central Bank Law in 2001, the CBRT was assigned the task of taking the required measures to bolster financial stability, in addition to its primary objective of price stability. In this framework, the CBRT has redesigned the inflation targeting regime that it had been implementing since 2006 so as to contribute to financial stability without precluding the priority of achieving price stability, and has gradually introduced a new monetary policy framework as of late 2010.

In the CBRT's new monetary policy approach, instruments such as the policy rate, the interest rate corridor, liquidity management and reserve requirement ratios are used simultaneously. The aim of these policies, along with the primary objective of price stability, is to gradually decrease the imbalances in the economy and thus, achieve a more sound growth composition.

In the period from the adoption of the new policy framework in November 2010 to the period with heightened uncertainties in the European economy in August 2011, the core aim was to channel short-term capital flows to longer term maturities and ensure a course for the Turkish lira that was more stable and aligned with the economic fundamentals. In this period, the interest rate corridor was widened downwards due to the strong risk appetite and the surge in short-term capital flows. Thus, it became possible to deter very short-term capital inflows by occasionally letting the overnight interest rates materialize lower than the policy rate. Moreover, the reserve requirement ratios were significantly raised to avert excessive credit growth and contain domestic demand. In this period, the course of the Turkish lira against the US dollar was notably distinct from those of other developing countries' currencies. All these measures made a significant contribution to the efforts towards eliminating the excessive appreciation pressure on the Turkish lira. Moreover, the share of long-term investments in capital inflows started to increase.

In the period between August 2011 and June 2012, intensified concerns over sovereign debt problems in some European countries led to a global increase in risk-aversion and an acceleration in capital outflows from emerging economies. Therefore, the policy instruments the Bank adopted in accordance with the new policy framework were used in the opposite direction of how they were used in times of accelerated capital inflows. At first, the interest rate corridor was narrowed by increasing the overnight borrowing rate, and Turkish lira reserve requirements were rearranged so as to reduce the liquidity needs of the banking system. Then, in October 2011, the CBRT widened the interest rate corridor upwards by delivering a sizeable hike in lending rates.

The macroeconomic indicators suggest that the policies implemented have proved to be effective in attaining the desired outcomes.

Through the liquidity management policy framework, which is one of the pillars of the new policy mix, overnight interest rates can be adjusted in response to economic and financial developments without changing the policy rate, namely the one-week repo rate. Thus, overnight interest rates in the money market were allowed to materialize higher than the policy rate with adjustments made to market funding. In this context, in order to prevent temporary price movements from deteriorating the inflation outlook via expectations, the CBRT implemented Additional Monetary Tightening (AMT) when deemed necessary. On days when AMT was implemented, the amount of money injected into the market over the policy rate via the quantity auction method was reduced and thus, interest rates moved closer to the upper bound of the interest rate corridor.

In response to the stability measures taken in the Euro area, the global risk appetite started to rise and the capital flows towards Turkey as well as other emerging economies have gained pace since June 2012. Moreover, data related to the current account balance and the growth composition, which points to a strengthening in the economic rebalancing process, has positively affected risk perceptions regarding Turkey. Meanwhile, the downward pressure of the domestic demand on inflation has become more apparent in this period and inflation has started trending down. Against this background, the CBRT, from early June on, has started to increase the liquidity injected into the market and has gradually decreased the average funding cost, thereby leading to a significant decline in overnight interest rates in the money market. With a view to contributing to financial stability, since September 2012, the CBRT, supported by the favorable inflation outlook, has narrowed the interest rate corridor by reducing the upper bound.

The Reserve Options Mechanism (ROM), which is another policy instrument recently developed by the CBRT, mainly aims to alleviate the adverse effects of the excessive volatility in capital movements on the macroeconomic and financial stability. By allowing the banks to hold a certain portion of the TL required reserves in foreign exchange (FX) and gold, this mechanism ensures them to hold additional foreign exchange and gold reserves voluntarily. Providing the banks with the flexibility to adjust their foreign exchange reserves held at the CBRT depending on the changes in external financing conditions is expected to alleviate the volatility caused by capital flows in the exchange rate. Furthermore, implementation of the ROM also helps under the mattress savings (gold) to circulate in the economy.

The macroeconomic indicators suggest that the policies implemented have proved to be effective in attaining the desired outcomes. Thanks to the new policy mix, the rebalancing between the domestic and foreign demand became more evident, the share of long-term investments in capital flows increased, the credit growth rates decreased to desired levels, the volatility of the Turkish lira diminished and inflation expectations started to converge towards the target set at 5 percent.

In the upcoming years, the CBRT will continue to reinforce the sustainable growth of the country by ensuring price stability and contributing to financial stability.

In 2012, in addition to the financial support that it lent to academic studies on various platforms, the CBRT continued to exchange views with international institutions, other central banks and academicians by organizing seminars and conferences at national and international levels. Within this scope, the CBRT organized a joint conference with the International Monetary Fund (IMF) on "Policy Responses to Commodity Price Movements" on 6-7 April 2012 in İstanbul. In partnership with the Central Bank of Brazil, the Bank of Finland and the Journal of Financial Stability, the CBRT organized a conference on "Financial and Macroeconomic Stability: Challenges Ahead" on 4-5 June 2012, and held a conference on "Financial Systemic Risk" on 27-28 September 2012 jointly with Mexico, which held the G20 Presidency in 2012. Another international event organized by the CBRT in 2012 was the conference on "Reserve Requirements and Other Macroprudential Policies: Experiences in Emerging Economies" held in İstanbul on 8-9 October 2012.

In order to enhance the CBRT's communication policy, which has a vital role in conveying the monetary policy, in 2013, Inflation Reports will continue to be promoted through press conferences held four times a year, twice in Ankara and twice in İstanbul. The bi-annual "Financial Stability Report", press releases regarding the monetary and exchange rate policy, bi-annual informational presentations on CBRT policies made before the Council of Ministers and the Planning and Budget Commission of the Grand National Assembly of Turkey, meetings with bank economists and analysts along with presentations and speeches made at national and international meetings, as well as other press releases will also play a key role in informing the public in 2013 as well.

The CBRT has significantly bolstered the financial and macroeconomic stability by contributing to the economic rebalancing in Turkey with the policies it has implemented over the past two years. While 2011 proved to be the year for the design and implementation of the new policies, 2012 reaped what had been sown in 2011. This period was marked by a more evident rebalancing process in addition to a stable disinflation trend. What is more, the rebalancing process was accompanied by growth in the economic activity. In the upcoming years, the CBRT will continue to reinforce the sustainable growth of the country by ensuring price stability and contributing to financial stability.