2.1.1. Overview

After the global financial crisis, monetary policies have begun to focus not only on price stability but also on financial stability across many countries. In order to contain the macrofinancial risks emerging from global imbalances, the CBRT continued with the monetary policy strategy that has been implemented without prejudice to price stability since 2010. To this end, in addition to short-term money market rates, the conventional monetary policy tool, the Bank actively used reserve requirement ratios, the ROM, the interest rate corridor and other liquidity policies in 2014.

Due to external and internal developments that affected risk perceptions in early 2014, the Turkish lira depreciated significantly and risk premiums increased notably. In order to contain the repercussions of these developments on inflation and macroeconomic stability, the CBRT decided in January to deliver a strong and front-loaded monetary tightening and to simplify its operational framework. The tight monetary stance helped to curb the deterioration of inflation expectations, to minimize the volatility in financial markets, and to improve risk premiums. Despite the measured rate cuts during mid-2014, the tight monetary policy stance was maintained throughout the year by keeping the yield curve nearly flat.

Global financial markets followed a volatile course in 2014. The ongoing uncertainty about the normalization of global monetary policies caused the global risk appetite and capital flows to be data-sensitive. Against this background, the CBRT maintained its prudent policy stance and delivered measured rate cuts by the second quarter of 2014. Meanwhile, in view of the heightened geopolitical tensions and the financial market volatility, the tight monetary policy stance was invigorated by a tight liquidity policy. Thus, the BIST overnight repo rates settled close to the upper end of the interest rate corridor when the tight liquidity policy was in effect.