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, nearly 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 economic volatility and to improve the deterioration in the inflation outlook by actively using the one-week repo rate, interest rate corridor, TRY and foreign-currency liquidity policies and required reserves.

In the post-crisis period, the unconventional policies of advanced economies and the uncertainties over these policies caused emerging market rates to become extremely sensitive to global monetary policy developments and advanced country data releases. The wide interest rate corridor and the tight liquidity policy implemented by the CBRT increased the resilience of the Turkish economy against global shocks and supported price stability and financial stability during this period.

After May 2013, the marked depreciation of the TRY had adverse effects on inflation and inflation expectations. In order to contain the deterioration in inflation expectations and pricing behavior, the CBRT has adopted a tight monetary policy stance since early 2014. Thanks to the tight liquidity policy implemented through most of 2015, the average funding rate was increased gradually and interbank overnight repo rates materialized at the upper bound of the interest rate corridor.

In the MPC decision of January, the favorable impact of the tight monetary policy stance and macroprudential measures on inflation, especially inflation excluding energy and food inflation indicators, and inflation expectations and the contribution of declining commodity prices, in particular oil prices, to disinflation were mentioned. In light of these positive developments, the MPC decided on a measured cut in the one week repo rate which was reduced from 8.25 percent to 7.75 percent.

In the MPC decision of February, the favorable impact of the ongoing cautious monetary policy along with prudent fiscal and macroprudential policies on inflation, especially inflation excluding energy and food inflation indicators, and inflation expectations, were mentioned. The MPC anticipated that the core inflation would continue to decline. Yet, it was assessed that a more persistent reduction in inflation necessitated a cautious approach in monetary policy. Taking into account the elevated volatility in food and energy prices, the MPC decided to cut the interest rates on a measured scale. To this end, marginal funding rate was reduced from 11.25 percent to 10.75 percent, the interest rate on borrowing facilities provided for primary dealers via repo transactions was reduced from 10.75 percent to 10.25 percent, and the borrowing rate was reduced from 7.5 percent to 7.25 percent and the late liquidity window (between 4:00 p.m. – 5:00 p.m.) CBRT lending rate was reduced from 12.75 percent to 12.25 percent. Moreover, the one-week repo rate was reduced from 7.75 percent to 7.50 percent.

With a view to limiting the effects of cumulative exchange rate movements recorded since early 2015 and volatilities in energy and food prices both on inflation and inflation expectations, the MPC maintained the tight monetary policy stance through 2015. The liquidity need has been mainly funded through one-week quantity repo auctions, while the share of marginal funding has been gradually increased since March.

In the MPC meeting of August, the MPC also discussed the roadmap to be implemented before and after global monetary policy normalization and decided to publish a strategy document with the MPC policy statement. The CBRT released a road map on 18 August 2015 regarding the policies to be implemented before and during the normalization of global monetary policies. Accordingly, the Bank announced that the width of the corridor will be narrowed and the interest rate corridor will be made more symmetric around the one-week repo interest rate. Moreover, this announcement also incorporated policies regarding Turkish lira liquidity, foreign exchange liquidity and financial stability to be implemented before and during the normalization. With respect to the Turkish lira liquidity, the quotation on the interest rate on borrowing facilities provided for primary dealers via repo transactions was terminated and collateral conditions for TRY transactions were simplified following the announcement of the road map. In addition, it was reminded that foreign exchange deposits can be used as collaterals against TRY transactions, and new simplified rules were announced regarding the use of this facility.

In the last MPC meeting of 2015, it was evaluated that, should the decline in volatility observed after the start of the global policy normalization persist, monetary policy simplification steps would begin with the next meeting in 2016.