Foreword

Murat Uysal
Governor

Following the slowdown in the second half of 2018, economic activity assumed a mild recovery trend in the first quarter of 2019 on the back of policy steps and measures taken. Despite decelerated external demand, exports of goods and services remained strong due to competitiveness gains and continued to support growth. Meanwhile, the moderate course of domestic demand and the level of real exchange rates limited imports. Against this background, the current account balance significantly improved and registered a positive value for the first time since 2002. Accordingly, the external financing need declined while the corporate sector started to pay down its debts. The Central Bank of the Republic of Turkey (CBRT) also contributed to this process by using an appropriate composition of its policy tools to bolster predictability in line with its objectives to achieve price stability and support financial stability.

Driven by exchange rate developments and the deterioration in pricing behavior, consumer inflation reached 20.3% by the end of 2018. However, it dropped by 8.5 points in 2019 due to the policies implemented, and closed the year at 11.8%. In 2019, weakening cumulative effects of the Turkish lira depreciation made the largest contribution to disinflation while mild demand conditions and import prices also supported it. On the other hand, real unit labor costs, and tax and administered price adjustments had a curbing effect on disinflation in 2019. The underlying trend of inflation also registered a significant improvement due to the amelioration of inflation expectations and pricing behavior throughout the year.

In 2019, while the policy stance was determined in a fashion to ensure continuation of the disinflation process, macroprudential tools were also used effectively for financial stability purposes. Under the tight monetary policy stance and strong policy coordination focusing on disinflation, the Turkish lira stabilized. Thus, inflation dynamics significantly improved on the back of waning cumulative exchange rate effects and the mild domestic demand. With the improvement in the inflation outlook, the policy rate was reduced from July through end-2019 to 12%.

To support financial stability, the CBRT continued to use an expanded set of tools in addition to the policy rate and liquidity policies in 2019. In this respect, regulations were introduced to use reserve requirements more flexibly and effectively as a counter-cyclical macroprudential tool to support financial stability, along with the main policy tool.

The CBRT also continued to use the communication channels actively in 2019 to reinforce the effectiveness of policies and increase awareness of price and financial stability. Accordingly, all platforms, the CBRT website in particular, were actively employed under the communications policy. Moreover, the Bank reached out to a larger audience to relate its policies by conducting regular meetings with representatives from the sector as well as with Turkish and foreign investors and analysts.

Under the duties assigned to it by law, the CBRT acts with a mission to contribute to social welfare by achieving price stability and supporting financial stability. In line with its vision to be one of the leading central banks of the world with its independence, credibility, efficient organization, qualified human resource, innovative approach, effective communication and advanced technological infrastructure, the CBRT supports the balanced and sustainable growth process in the Turkish economy. Consistent with the mutual agreement reached with the Government during the preparation of the New Economy Program, the target set for the 2020-2022 period is that inflation will converge to 5% towards 2022. Accordingly, the CBRT will continue to use all available policy instruments effectively to achieve this target.