Durmuş Yilmaz: Recent economic and financial developments in Turkey
Opening speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of
Turkey, at the 78th Ordinary Meeting of the General Assembly, Ankara, 20 April 2010.
* * *
I. Introduction
1. Esteemed Shareholders, Distinguished Guests and Members of the Press,
Welcome to the 78th Ordinary Meeting of the General Assembly of the Central Bank
of the Republic of Turkey.
2. I would like to start my speech with a brief evaluation of the global financial crisis
that deepened to spread over the whole world in the final quarter of 2008 and took
its toll throughout 2009. Later on, I will summarize the key macroeconomic
developments that took place in Turkey in 2009. Finally, I will share my evaluations
pertaining to inflation developments and monetary policy implementations.
II. Global economic developments
Distinguished Guests,
3. The effects of the financial crisis, which first started in advanced countries and
deepened mainly due to the bankruptcy of some major financial firms in the USA in
September 2008, continued to dominate financial markets throughout 2009.
Accordingly, growth rates slumped globally but particularly in advanced countries.
Owing to extensive liquidity operations led by central banks and large-scale
government interventions, the effects of the crisis started to subside as of the
second half of 2009 and the global economy exhibited signs of a slow and gradual
recovery.
4. The recovery in global economic activity that started on the back of the historically
large fiscal stimulus packages launched by advanced economies contributed to the
improvement of global risk perceptions and normalization of financial markets.
Readings on economic activity and global financial system in the first quarter of
2010 point out that the recovery is ongoing. However, soaring budget deficits
- especially in advanced economies - reach levels of concern, problems across
credit markets linger, and unemployment rates continue to remain elevated, all
suggesting that it would take a long time for the global economic problems to be
resolved permanently. Moreover, ongoing uncertainties regarding the exit strategies
from unconventional monetary and fiscal measures continue to pose risks on the
sustainability of the recovery.
5. It is observed that advanced and emerging market economies started to recover as
of the second quarter of 2009, mainly on the back of expansionary monetary and
fiscal policies implemented worldwide and on inventory accumulation mostly in
advanced economies. Despite positive signs of recovery in the global economy, high
unemployment rates in advanced countries, primarily in the USA and Euro Area, still
persist. With global economic growth mainly based on expansionary monetary and
fiscal policies temporary in nature and the fact that unemployment rates remain
currently high and oil prices re-started rallying, the global economic recovery will
likely to be slow and protracted.
Growth Rates and Unemployment Rates in Advanced and Emerging Economies
Growth Rates Advanced Economies Unemployment Rates
(Annual Percentage Change) (Percent)
10 11
USA Euro Area
8
9
6
4
7
2
0
5
-2
Advanced Economies
-4
Emerging Economies
3
Export Weighted
-6
0100 0102 0104 0106 0108
0397 0399 0301 0303 0305 0307 0309
Source: Bloomberg, CBRT. Source: Bloomberg, CBRT.
6. Commodity prices, which fell drastically in the last quarter of 2008 due to the
significant contraction in global economic activity, hovered at low levels in early
2009. However, commodity prices began trending upward as of the second half of
the year mainly on the back of the growing optimism about the global economic
recovery and the boosting demand stimulated by the fiscal incentives implemented
in China. The liquidity glut that was particularly fuelled by stimulus packages
implemented in advanced countries, and the accelerating global economic activity
resulted in an increase in oil and commodity prices, which further continued into the
first quarter of 2010 as well.
Commodity and Crude Oil Prices
S&P Goldman Sachs Commodity Crude Oil (Brent) Prices
Price Indices* (US dollar/bbl)
He adline Energy
300 150
Metal Precio us Meta l
Agriculture
250
110
200
150
70
100
50
30
0
*January 2007 average is taken as 100. Source: Bloomberg.
Source: Goldman Sachs.
7. Global inflation that had plummeted due to downward pressures arising from
demand and cost conditions since the second half of 2008, maintained its course in
2009 as well, and the annual rate of change in consumer prices in advanced
economies turned negative in May and June. However, it started to trend up in
August 2009, particularly due to the low base in 2008 and the surge in commodity
prices. The upward trend in global inflation, being more pronounced in emerging
economies, also continued into early 2010. Meanwhile, core inflation continued to
decline in advanced economies, while it trended upward in emerging economies.
CPI and Core CPI in Advanced and Emerging Economies
CPI in Advanced and Emerging Economies Core CPI in Advanced and Emerging Economies
(Annual Percentage Change) (Annual Percentage Change)
5 8 5
7
4
4
6
3
5
3
2
4
1
3 2
0
2
Advanced Economies
1
-1 Advanced Economies
1
Emerging Economies
Emerging Economies
-2 0
0
0107 0707 0108 0708 0109 0709 0110
0107 0707 0108 0708 0109 0709 0110
Source: Bloomberg, CBRT. Source: Bloomberg, Datastream, CBRT.
8. In the first half of 2009, the global financial markets recovered, albeit modestly
relative to the final quarter of 2008 when the impact of the crisis was felt most
strongly. This recovery is mainly attributable to measures taken worldwide in order
to ensure the proper functioning of financial markets, unconventional monetary and
fiscal measures taken by advanced countries and the relatively promising data on
global economic activity. The global risk appetite continued to improve, though
slowly, as of the year-end and early 2010.
Global Risk Appetite and Risk Premium Indicators
Currency and Risk Premium Indicators for
Global Risk Appetite Indices
Emerging Economies*
EMBI+ (basis points)
Credit Suisse Risk Appetite Index
1000 160
VIX (right axis-inverted)
Currency Index (basket - 1 US dollar
8 3
and 1 Euro) (right axis)
800
6 140
2.5
4
600
2
2
120
1.5
0 400
1
-2
100
200
0.5
-4
-6 0
0 80
0100 0101 0102 0103 0104 0105 0106 0107 0108 0109 0110
0607 1207 0608 1208 0609 1209
of the values that emerging market currencies take
*Average
against the currency basket of 1 US dollar and 1 Euro. Equals
100 on June 2007 and an upward movement denotes
depreciation of emerging market currencies.
Source: Bloomberg.
Source: Bloomberg.
BIS Review 68/2010
9. The rate cut cycle that was initiated by the central banks of both advanced and the
emerging countries at the height of the global crisis during the final quarter of 2008,
continued in the first quarter of 2009, albeit with less pace. Monetary easing cycle in
advanced economies, which significantly slowed down in the second quarter of
2009, ceased completely in the third quarter. Emerging market central banks, on the
other hand, continued to cut policy rates at a reduced pace to contain the impact of
the global crisis on economic activity.
10. As of year-end, most central banks kept policy rates at low levels and continued to
implement expansionary monetary policy to stimulate economic activity by using
unconventional monetary policy tools. In the first quarter of 2010, a limited number
of central banks tightened their monetary policy stance by increasing policy rates,
while most of them kept their rates unchanged at low levels. In the meantime, these
central banks started to terminate the expansionary monetary policy
implementations, which are conducted by the use of unconventional policy tools.
Policy Rates in Advanced and Inflation-Targeting Emerging Economies
Policy Rate in Inflation-Targeting Emerging
Policy Rate in Advanced Economies
Economies
5
20
Emerging Economies
Turkey
4
17
3
14
2
11
1
8
0
5
Source: Bloomberg, CBRT. Source: Bloomberg, CBRT.
Esteemed Guests,
11. After having summarized developments in the global economy in 2009, now I would
like to touch upon key macroeconomic developments in Turkey.
III. Developments in the Turkish economy
12. As I have already mentioned regarding the global economic developments, the
growing perception since the last quarter of 2009 that the worst of the crisis is over
and the economy has started to head towards recovery has driven the global risk
appetite higher. This boosted optimism in global financial markets and provided a
further positive bias towards riskier assets. Thus, emerging markets, including
Turkey, have experienced capital inflows through portfolio movements, which led to
an appreciation in their currencies and caused stock markets to rise.
Risk Premium Indicators
5-Year CDS Rate Changes* EMBI+
900
5.5 EMBI+ Turkey
Turkey
800
Brazil
EMBI+
700
4.5 S.Africa
Hungary
600
S.Korea
3.5
500
400
2.5
300
1.5
200
100
0.5
1007 0208 0608 1008 0209 0609 1009 0210
0808 1008 1208 0209 0409 0609 0809 1009 1209 0210
*Rate changes with base August 2008 (equals 1 on August 29,
2008).
Source: Bloomberg, CBRT. Source: Bloomberg.
13. However, an important point that needs to be highlighted is that risk indicators for
the Turkish economy have exhibited a more favorable performance compared to
that of other emerging market economies especially since the height of the crisis
during the final quarter of 2008. This development not only implies the soundness of
the Turkish financial structure, but also indicates that our economy has gained
resilience and strength against global crises compared to previous periods.
14. Turkey's CDS rating changed dramatically at the end of 2009. Medium to long-term
forecasts for Turkey were revised positively, many investors increased the weight of
Turkish assets in their portfolios, and more importantly, prominent credit-rating
agencies upgraded Turkey's credit rating. There may be some credit upgrades in
the upcoming period, in case a fiscal discipline backed by structural reforms is
achieved and maintained.
Relation Between Risk Premium and Credit Rating
Credit Rating-CDS Rate
Maximum Change in CDS During Crisis*
(January 8, 2010)
95 0 In dones ia
Ru ssia
22 0 Hung ary
85 0
Bulg aria
20 0
Colombia
75 0
(bp)
Indon esia
18 0
Rus sia
CDS
65 0
16 0
(bp)
in
Turkey
ate ge Hung ary
R 14 0 55 0
S.Korea
Mexi co
S. Africa
DS S.Africa
Chan C olombia
MexicoP eru
C P oland
12 0 Peru
of B ulgaria
Brazil 45 0
T urkey
Brazil
ate
Thailand
R
Malay sia
10 0
35 0
Polan dThailand
S.
KoreaMalay sia
C zech Rep.
8 0
Czech Rep . Chi le
25 0
C hina
Çin
6 0
15 0
0 2 4 6 8 10
0 2 4 6 8 10
S&P Credit Ratings (A+:1 , BB-:9)
S&P Cred it Ratings (A+:1, BB-:9 )
*The difference between the highest CDS spreads during and before the crisis.
Source: Bloomberg, CBRT.
BIS Review 68/2010
15. The higher performance exhibited by the Turkish economy compared to many other
emerging economies during the global crisis and the recent upgrades to our credit
rating are mainly attributable to the stability ensured in our financial system. Unlike
its peers, Turkey did not require any cash stimulus packages for its banking system
against the global financial crisis. The absence of toxic assets in banking balance
sheets, strong capital adequacy ratios and considerably low levels of foreign
exchange short positions have been the essentials underlying the increased
strength of our financial system against the global crisis.
Net Foreign Exchange Position of the Banking Sector
(Billion US Dollar)
1.1
0.6
0.1
-0.4
-0.9
-1.4
Source: BRSA.
Distinguished Guests,
16. With the problems driven by global turbulence, the domestic and foreign credit
conditions in Turkey tightened and Gross Domestic Product (GDP) growth rates
have slowed down significantly since the second quarter of 2008 as a result of
narrowing domestic demand. Economic activity has experienced hard landings from
the last quarter of 2008 to the second quarter of 2009. As the monetary and fiscal
measures started to sway, the GDP, after bottoming out, started to recover rapidly
as of the second quarter and contracted by 4.7 percent for the overall year. While
private investment and consumption expenditures had a negative effect,
government spending on consumption goods had a boosting effect on GDP growth
in 2009. Meanwhile, the positive contribution of the increased net exports as a result
of the reduced demand for imports partially limited the slowdown of growth in 2009.
GDP Growth Rates
GDP Growth Rates Gross Domestic Product
(Annual Percentage Change) (Seasonally Adjusted)
10
27
5
24
0
-5
21
-10
18
-15
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2006 2007 2008 2009
2003 2004 2005 2006 2007 2008 2009
Source: TURKSTAT. Source: TURKSTAT, CBRT.
17. The transformation that the Turkish economy has undergone in the post-2001 period
has caused major changes in the employment structure. The share of the
agricultural sector in employment was 35 percent in 2002, while, this ratio fell to
around 23 percent in 2007. However, with the recent economic slowdown, this trend
reversed temporarily and the share of agricultural sector in employment increased to
approximately 25 percent in 2009.
18. While global turmoil took a heavy toll on industrial employment, it had a scant impact
on employment in construction and services sectors. In 2009, industrial employment
contracted by 7 percent, whereas, employment in the construction sector and
services sector increased by 0.6 percent and 1.4 percent, respectively.
Employment by Sectors
(Percent)
80
60
40
20
0
2004 2005 2006 2007 2008 2009
Farm Non-Farm
Source: TURKSTAT.
19. Demographic changes in Turkey leads to an increase in the share of the working
population in the overall population and this, in turn, results in the unemployment to
persist. However, the recent upsurge in the unemployment rate is mainly attributable
to cyclical rather than structural factors. The economic contraction in 2009 increased
the labor force participation rate while significantly curbing the pace of employment
growth; hence the unemployment rate increased rapidly.
20. The labor force is comprised of 23,8 million people in 2008 and rose to 24.7 million
people in 2009 by an increase of 4 percentage points, whereas, employment
increased by a mere 0.4 percent, from 21.2 million to 21.3 million people. In this
period, the rapid increase in labor force participation while employment remained
much the same, caused the unemployment rate to climb to 14 percent in 2009 from
11 percent in 2008. Meanwhile, the non-farm unemployment rate increased from
13.6 percent to 17.4 percent.
21. As I mentioned in my previous presentations, creating new employment
opportunities for the growing labor supply in Turkey is contingent upon carrying out
cost-reducing and resilience-enhancing reforms in labor markets. These reforms, by
promoting registered employment, will also help us overcome problems in our social
security system.
Unemployment Rates
(Percent)
18
15
12
9
6
3
0
2004 2005 2006 2007 2008 2009
Unemployment Rate Non-Farm Unemployment Rate
Source: TURKSTAT, CBRT.
Distinguished Guests,
22. The impact of the global economic crisis on Turkey's foreign trade has been evident,
and the contraction in domestic and foreign demand and the slumps in commodity
prices, especially in crude oil as well as iron and steel led imports and exports to
shrink rapidly as of the last quarter of 2008. Significant declines have been observed
throughout the year in imports and exports, which tended to recover as of the
second quarter of 2009 as signs of revival in global economic activity appeared.
Total exports of goods fell by 22.1 percent to 109.7 billion USD, while total imports
of goods fell by 30.7 percent year-on-year to 134.4 billion USD in 2009.
Consequently, the foreign trade deficit, which was 53 billion USD in 2008, dropped
to 24.7 billion USD in 2009.
23. The adverse impact of the global crisis on tourism revenues was translated as a
decrease in expenditures. In 2009, tourism revenues decreased by 3.2 percent. The
said decline is mainly attributable to the fall in average tourism revenues. In fact, the
number of visitors increased by 3.3 percent in 2009. Due to the recovery in other
services items, the slowdown in the services surplus remained limited at 5.3
percent. Hence, the current account deficit has been 13.9 billion USD in 2009, while
the ratio of current account deficit to GDP fell from 5.6 percent in 2008 to 2.2
percent in 2009.
Current Account Balance/GDP*
3
(Percent)
2
1
0
-1
-2
-3
-4
-5
-6
-7
01-I 02-II 03-III 04-IV 06-I 07-II 08-III 09-IV
*Annualized data.
Source: CBRT.
Distinguished Guests,
24. Uncertainties led by the global crisis adversely affected the credit market in Turkey
as well. On the supply side, 2009 is evaluated as a year in which the banks were
cautious in lending basically due to risk perceptions. On the demand side, the
demand for investment loans has been on a decline because of the slowdown in
economic activity. On the other hand, the willingness of firms to restructure their
debts emerged as a significant factor that increased credit demand.
Consumer Loans and Credit Card Claims
(Real Quarterly Percentage Change, End Values)
2008 2009
III IV I II III IV
Consumer Loans 6.0 -5.0 -0.7 2.0 2.0 2.2
Housing 3.5 -4.4 -0.6 2.0 2.5 3.4
Automobile -0.5 -11.9 -10.5 -4.9 -5.7 -7.1
Other 9.6 -4.5 0.5 2.9 2.5 2.1
Credit Cards 6.6 -0.4 -3.3 5.0 1.7 -1.9
Source: CBRT.
25. Measures taken by the Central Bank to maintain financial stability and to promote
the functionality of credit markets had favorable impacts on credit markets during the
crisis. Policy rate cuts and stabilizing liquidity measures were reflected on credit
rates and this contributed to the easing of financial tightness. Especially as of the
second half of 2009, with the decline in credit rates, the uptrend in credit volume
became more pronounced.
Distinguished Guests,
26. The comprehensive fiscal incentive policies implemented to alleviate the effects of
the global economic crisis caused fiscal deficits and debts stocks to soar globally,
primarily in advanced countries. Additionally, the decline in tax revenues consequent
to the contraction in economic activity accelerated the increase in budget deficits.
27. In parallel with the global rise in government fiscal balances, the ratios of budget
deficits and debt stocks to national income also soared in Turkey in 2009. During
this period, lower-than-targeted tax revenues due to contraction in domestic demand
as well as higher-than-targeted primary expenditures mainly due to increase in
current transfers to Social Security Institution due to slowdown in employment
growth have been the primary causes of the surge in the budget deficit. An analysis
of developments in public finance in the first quarter of 2010 reveals that the central
government budget balance had an improved year-on-year performance, this being
mainly attributable to the increase in tax revenues with the revival in economic
activity.
Central Government Budget Deficit and EU-Defined Public Debt Stock
Budget Deficit Public Debt Stock
(Ratio to GDP) (Ratio to GDP)
1 2 80
Public Debt Stock
Budget D efici t
Maast rich t Cri teri a: 3% Maastricht Criteria: 60%
9 60
49.0
48.847.8
40
6
4.9
4.0
3 .2
20
3
0
0
1 4 7
02 05 08 0*
003 006 009 11* 2001 2002 2003 2004 2005 2006 2007 2008 2009
012* 2010* 2011* 2012*
200 20 2 200 20 2 200 20 2
201 20 2
* Medium Term Program (2010-2012) Targets. * Medium Term Program (2010-2012) Targets.
Source: Ministry of Finance, Medium Term Program Source: Ministry of Finance, Medium Term Program (2010-2012).
(20102012).
28. The determined implementation of fiscal discipline in Turkey since 2002 has helped
cut the ratios of government budget deficit and debt to GDP, to a level well below
the average of both advanced and emerging economies. Although Turkey's budget
deficit expanded at a faster pace than in many other emerging economies in 2009,
according to the MTP projections, government debt stock is likely to remain below
the average of other emerging economies in the upcoming years.
General Government Budget Deficit and Debt Ratio
Average Values in Advanced Countries and Turkey Average Values in Emerging Countries and Turkey
(Percent of GDP) (Percent of GDP)
100
70
Aver age of A dvanced
Aver age of Em erging
Countrie s** 2012
2003
Countries**
90 65
2003
Debt
80 60
Debt
2008
70 55
2003
2003 2012
60
Government 50
overnment
al
G
2008
2012
al
50
ener 45
2012
G
40
Gener
40
Turkey
2008 Tur key
2008
30
35
-2 0 2 4 6 8 10
-2 0 2 4 6 8 10
Budget D eficit
Budget Defic it
*Dashed lines indicate forecasts. * Dashed lines indicate forecasts.
**Includes USA, UK, Germany, France, Spain, Ireland, Iceland, **Includes Hungary, Mexico, Romania, Argentina, Brazil, Bulgaria,
Japan, Portugal, Israel, Greece, Italy, Austria, New Zealand and Czech Republic, India, Indonesia, Israel, Malaysia, Poland, Singapore
South Korea. and South Africa.
Source: IMF. Turkish data is taken from the Ministry of Finance, Source: IMF. Turkish data is taken from the Ministry of Finance,
Undersecreteriat of Treasury, Medium Term Program (2010-2012) Undersecreteriat of Treasury, Medium Term Program (2010-2012)
and Program for 2009. and Program for 2009.
29. Under current economic circumstances, in order to reinforce the optimism about
sustainable macroeconomic stability in the medium term and to ensure effective
expectations management, it is crucial that government budget deficit and debt
should be kept under control through commitments with a strong institutional
background. In this regard, attaining the targets set out in the MTP through
institutional and structural improvements rather than by tax and price adjustments, is
critical for further enhancing gains already achieved in terms of country risk.
Esteemed Guests,
30. In the last part of my speech, I would like to mention the monetary policy strategy
that we implemented in this atmosphere of uncertainty created by the global
economic crisis. I will, first of all, give an evaluation on inflation developments and
monetary policy implementations within the scope of the inflation targeting regime.
Then, I will briefly touch upon the exit strategy, the details of which were shared with
the public last week, for gradually withdrawing measures taken during extraordinary
circumstances.
IV. Inflation developments and monetary policy implementations
31. As I have also mentioned at the beginning of my speech when evaluating the global
economic developments, inflation rates saw dramatic declines on a global basis due
to rapidly contracting economic activity and plunging commodity prices as of the last
quarter of 2008. During this period, a similar pace was observed in Turkey regarding
the inflation outlook. Despite the relatively sound structure of the Turkish financial
sector, our exports being composed of mainly products sensitive to foreign
conjuncture; the sensitivity of production to global credit conditions and high level of
capacity at the onset of the crisis have deepened the contraction in economic
activity. During this period, in addition to tightness in financial conditions, a sharp
contraction in domestic demand was also experienced due to prevailing perception
of uncertainty and increased precautionary savings. Furthermore, temporary tax
incentives for stimulating the domestic demand led inflation to fall faster-than-
expected in the first half of 2009. Consequently, the inflation rate remained below
the announced target-consistent-path, in June.
32. As I have previously mentioned, as the pace of recovery in the global economy
became more pronounced, the risk appetite in global financial markets started to
boost as of the second half of 2009. Accordingly, emerging markets attracted more
capital through increased portfolio movements. On the Turkish economy side, this
led to appreciation of the Turkish lira against major currencies, which limited the
adverse effect of import price hikes on unit costs. In the third quarter of 2009,
despite the upward inflationary pressure from tax adjustments to restore fiscal
balance, the annual rate of change in consumer prices maintained its downward
pace due to declining course of the underlying trend. By the end of the third quarter,
the inflation rate continued to remain below the target-consistent-path.
Annual CPI Inflation and the Target-Consistent-Path
(Annual Percentage Change)
12
10
8
6
4
Annual CPI Inflation
Target
2
Uncertainty Band
0
Source: TURKSTAT, CBRT.
33. In the last quarter of 2009, in line with our projections, both domestic and external
demand, one of the factors that affect the underlying inflation trend, maintained their
pace of moderate recovery, and resource utilization in the economy continued to
remain low. Yet, inflation was up by 1 percentage point from October Inflation
Report projections due to the highest increase in unprocessed food prices of the
recent past. Consequently, inflation remained slightly below the target at end-2009
with 6.53 percent, yet remained within the uncertainty band.
34. An analysis of inflation developments in 2009 by subcategories suggests that annual
inflation slowed down in all main categories excluding food and energy for which tax
adjustments were effective. Although food price inflation remained low relative to
recent years, among all subcategories, the biggest contributor to overall inflation has
been food prices. This is attributable to hikes in unprocessed food prices driven by
supply-side shocks.
CPI by Subcategories Contribution to CPI Inflation in 2009
(Annual Percentage Change) (Percentage Point)
25
Goods excl.
2006
Food and
2007
Energy
20
2008
29%
Food
2009
40%
15
Services
Energy
20%
11%
10
5
0
Food Energy Goods excl. Services
Food and Energy
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.
35. Despite having followed a volatile course during periods when temporary tax
adjustments were effective, core inflation, which is useful for predicting underlying
inflation, had a remarkable downtrend consistent with medium-term targets
throughout 2009.
Core Inflation Indicators and CPI Inflation
(Annual Percentage Change)
12
10
8
6
4
2
0
CPI SCA-H SCA-I
Source: TURKSTAT, CBRT.
36. Recent data releases indicate that the pace of recovery in economic activity
continues. Domestic demand rises gradually as the lagged effects of monetary
policy implementations become evident, whereas, uncertainties regarding external
demand persist. Accordingly, we expect that after following a volatile course
significantly above the target for some period, inflation will be back on a downtrend
by the phasing out of temporary effects as of the last quarter of the year and return
to target-consistent levels as of early 2011. At this point, I would like to emphasize
that we closely monitor pricing behavior as inflation hovers around high levels, albeit
for a temporary period. I would like to hereby remind you that we will provide public
with the updated evaluations and forecasts on medium-term inflation outlook along
with possible risks and policy measures, more extensively in the Inflation Report to
be published on 29 April.
Distinguished Guests,
37. Throughout 2009, as the Central Bank, we focused on policies oriented towards
containing the adverse effects of the crisis on the economic activity and on financial
stability while also overseeing price stability. Thanks to the experience gained from
domestic crises in the recent past, we were able to make prompt and effective
decisions, thus we were able to do our part to minimize the adverse impacts of the
global crisis. In this period, the soundness of the financial system in addition to the
relatively limited deterioration in the risk premium provided monetary policy with an
extra room for maneuver.
38. Accordingly, envisioning that undershooting the inflation target at year-end has been
more likely, we continued the rate cut cycle that we initiated in November 2008 by
pursuing a front-loaded monetary policy in early 2009. Despite signals of partial
recovery in domestic economic activity as of May, we continued rate cuts until
November 2009 in view of the ongoing uncertainties pertaining to the strength and
sustainability of the demand recovery and also anticipating that it would take a
considerable period of time before economic activity recovers and employment
conditions would improve. The policy rate cuts were terminated in December 2009,
due to stronger perceptions that economic activity had started to recover. Thus, the
policy rates were cut by a total of 1025 basis points since November 2008.
Monetary Policy Committee's Policy Rate Decisions in 2009
Policy Rate Decision
Policy Rate
Meeting Date
(Percentage point)
(Percent)
January 15, 2009 -2.00 13.00
February 19, 2009 -1.50 11.50
March 19, 2009 -1.00 10.50
April 16, 2009 -0.75 9.75
May 14, 2009 -0.50 9.25
June 16, 2009 -0.50 8.75
July 16, 2009 -0.50 8.25
August 18, 2009 -0.50 7.75
September 17, 2009 -0.50 7.25
October 15, 2009 -0.50 6.75
November 19, 2009 -0.25 6.50
December 17, 2009 No Change 6.50
January 14, 2010 No Change 6.50
February 16, 2010 No Change 6.50
March 18, 2010 No Change 6.50
April 13, 2010 No Change 6.50
Source: CBRT.
39. Developments following the initiation of policy rate cuts have confirmed our
projections on the magnitude of the crisis and its impact on economic activity and on
inflation outlook, and have justified our policy decisions. This, in return, enhanced
the effectiveness of the monetary policy decisions on financial variables and
expectations. Consequently, in 2009, determining role of Central Bank in shaping
market interest rates has improved and hence, market interest rates came down to
historic lows by following the monetary policy stance even during periods marked by
high global risk perceptions. Furthermore, we observe that our policy rate cuts have
also been effective on credit rates as of the second half of 2009. The downtrend in
credit interest rates especially accelerated further following the issue of July Inflation
Report which presented a solid perspective on medium-term policy, and on the back
of the improvement in global risk perceptions, credit markets have witnessed
favorable developments as of the last quarter of 2009.
Interest Rate Developments
Loan Rates
ISE Bills and Bonds Market and CBRT O/N
(Annual, Percent)
Interest Rates
30
26 ISE Bills and Bonds
Market Interest Rate
25
(Benchmark,
Compounded)
21
20
CBRT O/N Interest Rate
(Compounded)
15
Housing
16
Automobile
10
Consumer
Business
11
5
6
Source: ISE, CBRT. Source: CBRT.
Esteemed Guests,
40. We effectively used all policy instruments to maintain financial stability during the
height of the crisis. As the crisis began to deepen in October 2008, we, by
establishing a strong line of communication with the public about the details and the
robust structure of the liquidity management strategy, have announced liquidity
facilities to be provided to the markets step-by-step, in a clear and transparent way.
Subsequently, by gradually introducing the announced measures for both Turkish
lira and foreign exchange markets, we considerably removed the disturbances and
volatilities in the markets. In this regard, we continued to implement measures that
were taken as of October 2008 - when the crisis started to deepen - for ensuring
smooth operation of Turkish lira and foreign exchange markets and supporting the
corporate sector, in 2009 as well. In this part of my speech, I would like to outline the
measures that we have taken.
41. The monetary measures implemented for Turkish lira during the crisis can be
classified into two main groups: The first pillar of monetary measures was the
implementations to ease the uncertainties in money markets caused by the crisis. In
this regard, as of October 2008, we started to inject liquidity excessively in order to
reduce potential tension in money markets and to completely eliminate volatility in
overnight interest rates. However, at this point, I would like to remind you that the
excess liquidity generated as a result of the implementation which was continued
throughout 2009, was sterilized by overnight operations at the end of the day.
42. The second pillar of the monetary measures was the arrangements we made to
support the credit markets in view of the permanent decline in liquidity. In this
regard, as a result of the increasing net liquidity shortage in the market and the
possibility that this shortage may become permanent, the Central Bank started to
hold 3-month repo auctions as of June in order to support the smooth operation of
the credit mechanis