2.2.1. Turkish Lira Liquidity Management

After May 2013, global monetary policy developments were the key drivers behind the movements in financial markets. In this period, all financial assets were re-priced on a global level while emerging economies witnessed portfolio outflows. The CBRT adopted policies to contain the spillover effects of the global volatility and to improve the deteriorated inflation outlook by actively using the instruments of the one-week repo rate, the interest rate corridor, TL and foreign-currency liquidity policies and the ROM.

At an interim meeting of the MPC on 28 January 2014, it was expressed that a considerable depreciation of Turkish Lira and remarkable increase of risk premium had been observed due to the developments which had been adversely affecting risk perception in domestic and international markets. A strong and frontloaded monetary tightening and simplifying operational framework were decided in order to confine the adverse effects of these developments on inflation and macroeconomic stability. In this respect, the one-week repo rate was raised to 10 percent from 4.5 percent. In addition, marginal funding rate and the interest rate on borrowing facilities provided for primary dealers via repo transactions was raised to 12 percent and 11.5 percent from 7.75 percent and 6.75 percent respectively. In the meantime, the borrowing rate was held at 0 percent while the lending rate was raised to 15 percent from 10.25 percent within the late liquidity framework.

It was announced that with simplification of the monetary policy framework the Central Bank funding would be provided primarily from the one-week repo rate instead of the marginal funding rate and it was emphasized that the tight monetary policy stance would be sustained until there was a significant improvement in the inflation outlook.

In February and March MPC decisions, it was assessed that the upside risks on the inflation outlook and expectations maintained their importance, but the strong and frontloaded monetary tightening delivered at the January interim meeting had contained the adverse impact of such risks on the medium term inflation expectations. The committee highlighted that inflation was expected to increase until June, partly reflecting base effects. Against this backdrop, inflation expectations and pricing behavior would be closely monitored and the tight monetary policy stance would be maintained until there was a significant improvement in the inflation outlook.

By pointing to the deceleration in private FDD in response to the tight monetary stance, macroprudential measures and weak capital flows, it was emphasized that demand conditions and its composition would support disinflation and lead to a significant improvement in current account deficit in 2014.

In the MPC decision of April, the late liquidity window lending interest rate was reduced from 15 percent to 13.5 percent due to the reduction in the need for an additional tightening in liquidity policy in response to the recent decline in uncertainties and partial improvement in the risk premium indicators.

With the decline in uncertainties and improvement in the risk premium indicators during May, a measured decrease in the one week funding rate of 50 basis points was decided in parallel with the reduction of market interest rates for all maturities. The tight monetary policy stance to be maintained by keeping a flat yield curve until a significant improvement in the inflation outlook was emphasized.

As a result of the gradual tapering off in the adverse impact of exchange rate developments since mid- 2013 on annual inflation, in the June and July MPC meetings measured cuts of 75 and 50 basis points in the one-week repo rate were delivered respectively in light of the recent improvement in global liquidity conditions encountered in the second quarter of 2014 . On the other hand, the CBRT borrowing rate was cut by 50 basis points in July. In the August MPC meeting, the Marginal Funding Rate was reduced from 12 percent to 11.25 percent, and the interest rate on borrowing facilities provided for primary dealers via repo transactions was reduced from 11.5 to 10.75 in order to maintain the current policy stance in the short term rates within a more symmetric interest rate corridor.

The macroprudential measures implemented at the beginning of 2014 and the tight monetary policy stance paid off and favorable impacts on the core inflation trend began to be observed. This disinflation process is believed to be further supported in 2015 by the falling commodity prices, especially oil prices. Notwithstanding, keeping in mind the elevated food prices, the tight monetary policy stance was kept in place in the last four months of 2014 by maintaining a flat yield curve, to make sure that the improvement in the inflation outlook was here to stay.