OF CENTRAL OF THE REPUBLIC OF AFTER GLOBAL

Monetary Policy of of the Republic of Turkey after Global Financial Crisis

ERDEM BAŞÇI*

ABSTRACT he expansionary monetary poli- The recent global financial crisis cies, which were adopted by presented substantial challenges Tcentral of developed and lessons for all economic agents. countries in the aftermath of the global One of the most important lessons financial turmoil with the aim of con- learned was the indispensability of taining the impact of the global crisis, financial stability for the smooth had significant implications for develop- functioning of the economy as ing economies and Turkey was no ex- a whole. The Central Bank of the ception.1 During this period, the avail- Republic of Turkey (CBRT), being aware of the conditions that new ability of ample and low-cost short-term global economic conjuncture foreign financing led to a rapid credit necessitates, decided to modify expansion and appreciation pressure on its existing framework of the Turkish lira. This brought the ac- targeting by adopting a new policy cumulation of macro-financial risks and by using required reserve ratios rising external imbalances as of the sec- and corridor. The new ond half of 2010.2 As escalating risks approach preserves the pertaining to financial stability have the main objective of achieving and potential to hamper price stability over maintaining price stability while the medium term, different approaches safeguarding financial stability as a for incorporating financial stability into supporting objective. the monetary policy framework started to be discussed in the academic litera- ture and policy institutions.3

* Governor, The Central Bank of the Republic of Turkey (CBRT), [email protected]

Insight Turkey Vol. 14 / No. 2 / 2012 pp. 23-26 SPRING 2012 23 ERDEM BAŞÇI Photo: REUTERS, Adrees Latif REUTERS, Adrees Photo: An Occupy Wall Street protester sits near makeshift signs in New York’s Union Square.

The Central Bank Law, which was way without hampering the medium- amended in 2001, gives responsibility term inflation outlook. Accordingly, the Bank with taking necessary measures policies are pursued to prevent exces- to contribute financial stability alongside sive deviation of the exchange rate from its primary mandate of achieving and economic fundamentals, while the nec- maintaining price stability. Accordingly, essary measures are taken in collabora- in order to contain macro-financial risks tion with other regulatory institutions, in the domestic economy posed by the to avoid excessive credit growth.4 global imbalances, the CBRT designed and launched a new policy strategy by The New Policy Mix the end of 2010. The new strategy pre- serves the main objective of achieving In the period between November 2010 and maintaining price stability while - when the new policy strategy was in- safeguarding financial stability as a sup- troduced - and August 2011, which was porting objective. In this context, in ad- marked by escalating uncertainties in the dition to the policy rate, complementary European economy, the monetary policy tools such as reserve requirement ratios strategy was shaped around two axes. and the interest rate corridor are also First, channeling capital inflows towards used in order to cope with financial im- long-term investments and preventing balances. These policies aim to ensure the over-appreciation of the Turkish lira sounder economic growth in a gradual was targeted. And the second goal was a

24 INSIGHT TURKEY MONETARY POLICY OF CENTRAL BANK OF THE REPUBLIC OF TURKEY AFTER GLOBAL FINANCIAL CRISIS

more controlled growth in domestic loans reached historic highs.6 As capital out- and domestic demand while rebalancing flows from developing countries accel- domestic and external demand. During erated in this period, the CBRT used this period, the interest rate corridor was the same policy tools but in the oppo- widened to the south due to the strong site direction than during the period of risk appetite and intense short-term cap- rapid capital inflows. The interest rate ital inflows. Hence, overnight interest corridor was narrowed through raising rates were allowed to occasionally fall overnight borrowing rates and Turkish below the policy rate so that short term lira reserve requirements were revised carry trade was discouraged. Also dur- to decrease the liquidity requirement of ing the same period, reserve require- the banking sector. Moreover, a series ment ratios were significantly increased of liquidity measures were introduced with the goal of preventing excessive to contain fluctuations in the foreign ex- credit growth and controlling domestic change market. demand. Moreover, foreign exchange However, the rise in inflation was buying auctions were held regularly to higher than expected due to the exces- take advantage of strong capital inflows sive depreciation of the Turkish lira in reserve build-up. These measures stemming from the deterioration of the made a significant contribution in miti- global risk appetite since August 2011 gating excessive appreciation pressures and adjustments in administered goods on the Turkish lira.5 Meanwhile, a no- prices in the final quarter. In order to table deceleration was observed in loan contain the adverse effects on the medi- growth after mid-2011 owing also to the um-term inflation expectations and out- measures taken by other public authori- look, the CBRT raised overnight lend- ties, especially those taken by the Bank- ing rates in October 2011 and widened ing Regulation and Supervision Agency. the interest rate corridor upwards. Thus, As a consequence, the composition of overnight lending rates were permit- aggregate demand and the quality of ted to materialize above the policy rate capital inflows started to improve, al- through adjustments to the funding pro- lowing the Turkish economy to follow a vided to the market. In the meantime, rebalancing path as of mid-2011. reserve requirement ratios were reduced in order to prevent an undesirable tight- Policy After August 2011 – Sover- ening in liquidity conditions driven by eign Debt Problems in the increase in overnight interest rates. Accordingly, the measures taken Due to mounting concerns over the glob- since August 2011 have significantly al growth outlook and sovereign debt contributed to alleviate the adverse ef- problems in some European economies, fects of global problems on the Turk- as of August 2011, global risk aversion ish economy. The CBRT’s measures escalated and volatility in risk appetite regarding the foreign exchange market

SPRING 2012 25 ERDEM BAŞÇI

and decisions related to the interest rate Panoramic View of Eight Centuries of Finan- corridor in August and October 2011 cial Crises”. NBER Working Paper, No. 13882, (2008). reduced the degree of fluctuations in the 2. Çınar, B., Erdoğan, Ö., Gürgür, T. ve exchange rate compared to that of other Polat, T. “Küresel Kriz Etkileşim Kanalları ve emerging market economies. Mean- Türkiye Ekonomisi”. TCMB Ekonomi Notları, No. 10/07, (2010). while, the monetary tightening imple- 3. Goodhart, C. “The Changing Roleof mented since October 2011 has also Central Banks”. BIS Working Papers, No. 326, contributed to moderating the excessive (2010); Borio, C. “Central Banking Post-Crisis: credit growth. What Compass for Uncharted Waters?” BIS Working Papers, No. 353, (2011). 4. For the effects of over borrowing, see: Conclusion Cecchetti, S., Mohanty, M. S., and Zampolli, F. “The Real Effects of Debt”. BIS Working Pa- pers, No. 352, (2011). As was the case in 2011, the CBRT will 5. Başçı, E. and Kara, H. “Finansal İstikrar continue to safeguard the flexibility of ve Para Politikası”. İktisat, İşletme ve Finans, the monetary policy in line with chang- Vol. 26, No. 302, (2011). 6. Eichengreen, Barry; Mohamed El-Erian, ing global conditions, and ensure pre- Arminio Fraga, Takatoshi Ito, Jean Pisani-Ferry, dictability through effective communica- Eswar Prasad, Raghuram Rajan, Maria Ramos, tion. The monetary policy will continue Carmen Reinhart, Hélène Rey, Dani Rodrik, to contribute to the sustainable growth Kenneth Rogoff, Hyun Song Shin, Andres Ve- lasco, Beatrice Weder di Mauro ve Yongding Yu: prospects of the Turkish economy in the Committee on International Economicand Policy context of price stability. Reform (2011). “Rethinking Central Banking”. Brookings and Alfred P. Sloan Foundation e-Book. http://www.brookings.edu/reports/2011/09_ Endnotes ciepr_central_banking.aspx; For the effects of uncertainty shocks, see: Bloom, Nicholas. “The 1. For global financial crisis, see: Reinhart, Impact of Uncertainty Shocks”. Econometrica, 77 C. and Rogoff, K. “This Time is Different: A (3) (2009) p. 623-685.

26 INSIGHT TURKEY