2.2.1. Turkish Lira Liquidity Management

In the last quarter of 2011, with the intention of containing medium-term inflation expectations, the CBRT widened the interest rate corridor upwards by raising the overnight lending rate by 350 basis points in October. Accordingly, the funding amount provided via quantity auctions at the one-week repo rate was reduced and the banks were enabled to meet their funding needs through sources of higher costs within the widened band.

In order to prevent this from leading to an undesirable additional tightening in liquidity conditions, TL reserve requirement ratios were decreased and the TL liquidity needs of the banking system were permanently reduced. To provide banks with enhanced flexibility in liquidity management, one-month repo auctions, which were launched on 27 December 2011, continued in 2012.

In order to enhance predictability regarding the liquidity management, the CBRT regularly announced to the public the upper and lower limits of the amounts to be ensured via one-week repo auctions to apply between the MPC meetings (Table 2).

Following the measures taken in October, the CBRT opted for additional monetary tightening operations occasionally in 2012 to avert tail risks of inflation. Accordingly, the funding provided through the policy rate was suspended for a while, and one-week repo funding was provided by intraday repo auctions conducted via the traditional auction method. On the days of additional monetary tightening, transactions at the ISE and Interbank Money Markets made at the CBRT lending rate and the primary dealer repo interest rate within the CBRT led the money market interest rate to be close to the upper band of the CBRT's interest rate corridor.

In the context of macroprudential measures, to strengthen foreign exchange and gold reserves and ensure that banks manage their foreign exchange liquidities in a flexible way against external shocks, the portions of TL required reserves that can be kept as FX and gold as per the ROM were gradually raised in 2012. At the beginning of 2012, the portion of TL required reserves held by banks in FX and gold was TL 24 billion, while this amount reached TL 48 billion at end-2012. The TL liquidity need of the banking system decreased to a large extent owing to the increase in these facilities and the vigorous use of these facilities by banks.

Due to the partial recovery in global risk perceptions and the more pronounced rebalancing process in the economy, monetary policy has gradually become more accommodative since mid 2012. The CBRT started to lower the average cost of funding gradually as of early June by increasing the liquidity injected to the market. Considering the decline in risks against the global financial system as of September and in an effort to support credit markets, the MPC reduced the overnight lending rate by 150 basis points to 10 percent in September to 9.5 percent in October and to 9 percent in November. Furthermore, to contribute to financial stability, the Committee conducted a moderate policy-rate reduction by 25 basis points in December and set the policy rate as 5.50 percent (Table 4).