2.1.1. Overview

After the global financial crisis, monetary policy has begun to take into account financial stability as well as price stability in most countries. In order to contain macro financial risks that emerged from global imbalances, the CBRT adopted a new monetary policy strategy by improving the inflation targeting regime over the last three years. Under the new strategy that has been in place since the last quarter of 2010, the Bank has developed policies that aim at reducing macro financial risks without prejudice to price stability. To this end, in addition to money market rates, the conventional monetary policy tool, the Bank actively used reserve requirement ratios, Reserve Options Mechanism (ROM), interest rate corridor and other liquidity policies.

Due to ongoing uncertainties about global economy and considering macro financial risks, the CBRT continued with its flexible monetary policy practices until May 2013. In this period, because credit expansion was faster than expected thanks to strong capital flows, the Bank kept short-term interest rates low in order to offset the risks to financial stability, and continued to implement macroprudential measures boosting foreign exchange reserves. This policy stance helped to control the pressure on real exchange rate appreciation and maintain the rebalancing of domestic and external demand.

After May 2013, when uncertainties about monetary policies in global scale began to mount, financial markets faced increased uncertainty, primarily due to the monetary policies of developed countries. This increased uncertainty caused a re-pricing in all financial assets including exchange rates, and the share of emerging markets in global portfolio investments decreased. While the Turkish economy was affected similarly during this period, there were capital outflows from portfolio items although external borrowings of financial and nonfinancial sectors were sound. Against this background, the CBRT adopted a cautious stance to not only balance macro financial risks, but also contain the deterioration in the inflation outlook.

The susceptibility of advanced economies’ monetary stances to high-frequency data releases added to financial market uncertainties in this period. To contain the spillover from such uncertainties, the CBRT decided to gradually increase the predictability of the Turkish lira liquidity policy. To this end, the Bank decided to pursue a strategy of reducing interest rate uncertainty by creating a framework where the relationship between global interest rates and domestic interest rates has largely weakened and market rates have become more responsive to domestic macroeconomic developments.