Foreword

In 2013, the global economic activity remained weak and uncertainties regarding the global monetary policies intensified. The recovery trend in the United States (US) economy has not been on a stable track yet. Moreover, financial fluctuations and budget discussions have caused tightening in the financial conditions, posing unfavorable risks to recovery. In spite of the positive signals in the Eurozone economies, the economic outlook is still weak due to high unemployment rates, the ongoing debt-reduction process and problems in the credit transmission mechanism.

Uncertainties over the global monetary policies linger, as these policies are molded by high-frequency and highly volatile data and developments. The same uncertainties have led to a re-pricing in all financial assets, including the exchange rates, and the share of emerging economies in global portfolio investments has dropped.

In the second half of 2013, there were capital outflows in portfolio items and re-pricing in financial assets in Turkey as well, although sectors did not have any problems in their external borrowings. Against these developments, the monetary policy assumed a cautious stance both to contain the deterioration in the inflation outlook and contribute to financial stability. In addition, the predictability of the monetary policy was increased to mitigate the impacts of global uncertainties on the Turkish economy.

The global financial crisis, which has affected the world since the last quarter of 2008, has urged central banks to implement novel policies. During this period, the conventional policies at hand have fallen short of igniting a revival in demand, which consequently has led to the frequent use of unconventional policies such as large-scale asset purchases and long-term funding instead. The change of policy has also become visible in the communication policies of central banks. In particular, the central banks in advanced economies started implementing forward guidance as the interest rates converged to zero. With forward guidance, central banks aim to increase the transparency of monetary policies while at the same time reduce the uncertainty surrounding these policies.

In the face of increased uncertainty regarding the global monetary policies since May 2013, the Central Bank of the Republic of Turkey (CBRT) has adopted a cautious monetary policy stance and tightened the liquidity policy in consideration of both the inflation indicators and the macrofinancial risks triggered by global uncertainties. Accordingly, the Bank has continued its additional monetary tightening to restrain the unfavorable effects of above-the-target inflation indicators on pricing behaviours. Moreover, the effective liquidity management has helped short-term interest rates to stand close to the upper bound of the interest rate corridor. In this way, the Bank delivered a front-loaded monetary tightening that was stronger than the uptrend in inflation expectations in that period. Starting from August, the Bank also decided to increase the predictability of the Turkish lira liquidity policy to contain the impacts of uncertainties surrounding the global monetary policies on the domestic economy. Subsequently, it adopted a strategy to ease the uncertainty regarding the interest rates, and built up a framework where there was now lesser of a relationship between global and domestic interest rates and market rates became, as they should, responsive to domestic macroeconomic developments.

Loan rates, which had been on a decline in the first half of 2013, assumed an uptrend as of the third quarter. This period-long uptrend was a reflection of global financial developments and the tightening in overnight lending rates that the CBRT delivered through the interest rate corridor in July and August. In the same period, there was also an increase in deposit, currency swap and the CBRT average funding rates as well as the interest rates applied to securities issued by banks which all show the Turkish lira funding cost for the banks.

In designing its monetary policy strategy, the CBRT closely monitors fiscal policy and tax adjustment developments in terms of their impact on the inflation outlook. The monetary policy stance may be revised if the fiscal policy deviates notably from the current framework and if this deviation affects the medium-term inflation outlook negatively.

Maintaining the cautious stance in fiscal and financial policies is crucial to preserve the economy’s resilience against global imbalances. In the medium-term, strengthening the structural reforms that will establish a lasting fiscal discipline and reduce the savings gap will support macroeconomic stability. Steps to be taken to strengthen structural reforms will also provide the monetary policy with more room for maneuver and contribute to social welfare by ensuring that long-term public borrowing rates remain permanently at low levels. Therefore, it is very important to realize the structural reforms stipulated by the Medium-Term Plan.

Under the current monetary policy implementation, the MPC decisions and Inflation Reports are the main communication tools of the CBRT. Accordingly, Inflation Reports were announced at press conferences by Governor Erdem Başçı on 29 January 2013 and on 30 July 2013 in Ankara and on 30 April 2013 and 31 October 2013 in İstanbul. With the Inflation Reports, the Bank shared with the public its evaluations on international economic developments; inflation, supply and demand developments; financial markets and financial intermediation and public finance as well as medium-term inflation and output gap forecasts.

Attaching great importance to contributing to financial stability along with its primary objective to achieve price stability, the CBRT released two issues of the Financial Stability Report on 30 May 2013 and 28 November 2013. The Financial Stability Report includes an analysis of the most recent developments on the financial stability front both in Turkey and around the world as well as various research conducted in the financial system.

In 2013, the Bank continued to post the MPC decisions on short-term interest rates and other monetary policy instruments as well as the summaries of the MPC meetings on its website. The CBRT made public its monetary and exchange rate policy for 2014 on 24 December 2013.

In 2013, with the aim of promoting the Bank and its policy implementations, the CBRT prepared several publications and released them in both print and electronic formats. Two booklets, Monetary Transmission Mechanism and Inflation and Price Stability, were published in 2013. These booklets were disseminated to banks, universities’ economics departments, libraries, non-governmental organizations and various other institutions in Turkey. The CBRT also continued to publish the quarterly CBRT Bulletin in 2013, which informs different segments of the public about its policy implementations as well as its corporate structure, activities and publications.

The CBRT has contributed to the rebalancing of the Turkish economy with the policies it implemented by closely monitoring advanced and emerging economies and significantly bolstered the financial and macroeconomic stability. Under rapidly changing global conditions, the Bank will continue to steer the monetary policy in line with its objectives and ensure predictability through its policy documents and communication tools.