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

Article excerpt

The expansionary monetary policies, which were adopted by central banks of developed countries in the aftermath of the global financial turmoil with the aim of containing the impact of the global crisis, had significant implications for developing economies and Turkey was no exception. (1) During this period, the availability of ample and low-cost short-term foreign financing led to a rapid credit expansion and appreciation pressure on the Turkish lira. This brought the accumulation of macro-financial risks and rising external imbalances as of the second half of 2010. (2) As escalating risks pertaining to financial stability have the potential to hamper price stability over the medium term, different approaches for incorporating financial stability into the monetary policy framework started to be discussed in the academic literature and policy institutions. (3)


The Central Bank Law, which was amended in 2001, gives responsibility the Bank with taking necessary measures to contribute financial stability alongside its primary mandate of achieving and maintaining price stability. Accordingly, in order to contain macro-financial risks in the domestic economy posed by the global imbalances, the CBRT designed and launched a new policy strategy by the end of 2010. The new strategy preserves the main objective of achieving and maintaining price stability while safeguarding financial stability as a supporting objective. In this context, in addition to the policy rate, complementary tools such as reserve requirement ratios and the interest rate corridor are also used in order to cope with financial imbalances. These policies aim to ensure sounder economic growth in a gradual way without hampering the medium-term inflation outlook. Accordingly, policies are pursued to prevent excessive deviation of the exchange rate from economic fundamentals, while the necessary measures are taken in collaboration with other regulatory institutions, to avoid excessive credit growth. (4)

The New Policy Mix

In the period between November 2010--when the new policy strategy was introduced--and August 2011, which was marked by escalating uncertainties in the European economy, the monetary policy strategy was shaped around two axes. First, channeling capital inflows towards long-term investments and preventing the over-appreciation of the Turkish lira was targeted. And the second goal was a more controlled growth in domestic loans and domestic demand while rebalancing domestic and external demand. During this period, the interest rate corridor was widened to the south due to the strong risk appetite and intense short-term capital inflows. Hence, overnight interest rates were allowed to occasionally fall below the policy rate so that short term carry trade was discouraged. Also during the same period, reserve requirement ratios were significantly increased with the goal of preventing excessive credit growth and controlling domestic demand. Moreover, foreign exchange buying auctions were held regularly to take advantage of strong capital inflows in reserve build-up. These measures made a significant contribution in mitigating excessive appreciation pressures on the Turkish lira. (5) Meanwhile, a notable deceleration was observed in loan growth after mid-2011 owing also to the measures taken by other public authorities, especially those taken by the Banking Regulation and Supervision Agency. As a consequence, the composition of aggregate demand and the quality of capital inflows started to improve, allowing the Turkish economy to follow a rebalancing path as of mid-2011.

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