Durmuş Yilmaz: Globalization and monetary policy
Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at
the conference on "Globalization, Inflation and Monetary Policy", Istanbul, 21 November
2008.
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Dear Guests,
I would like to welcome you all to the conference on "Globalization, Inflation and Monetary
Policy", organized by the Central Bank of Turkey. This conference will host a select group of
central bankers, experts and academics today and tomorrow. It is a great pleasure for us to
host this conference and such a distinguished group of participants. During these two days
we will have the opportunity to discuss the globalization and monetary policy aspects in the
context of current financial turmoil.
Dear Guests,
We have in the midst of fast changing economic agenda. When invited to an international
conference in the Spring of 2008, I was requested to make a speech on inflationist pressures
faced by world economies. The title of the session was In
"Inflation: Is it back to stay?".
Fall 2008, a few weeks before the start of the conference, the organizers informed me that
they had changed the theme of the conference. The new title was "How to cope with
deflationary risks?". In a very short span, the main talking points of the policy makers have
shifted from "decoupling", "high energy prices" and "food inflation" to "deflation", "recession"
and "credit crunch".
Today, international financial system shaped more and more by globalization is on the brink
of a crucial stage. The problems, which started in sub-prime mortgage markets in the United
States, have spread the whole financial system and reached a point that threatens the
economic stability. Indicators on risk perceptions are at its highest level of all times. We have
witnessed some relief in the liquidity shortage after the establishment of temporary reciprocal
currency arrangements of Federal Reserve Bank (FED) and Short Term Liquidity Facility
established by IMF, which is designed to help member countries that are facing temporary
liquidity problems in the global capital markets. However, despite these measures, liquidity
squeeze in the credit markets and reluctance in bank's tendency to lend credit have been
unabated. One of the adverse features of the current crisis is the freeze in the private credit
and the tendency of capital to flow back to where the current crisis originated.
Recent readings on economic activities suggest that ongoing problems in international credit
markets have spilled over into the real economy as well. Recent estimates of international
institutions point out a prolonged period of recession in developed economies and a sharp
slow down in growth rates of developing economies.
Addressing these challenges, G-20 Summit held in Brazil on 8-9 November 2008, issued a
communiqué that included the following statement: "We affirmed our determination to take all
necessary steps to foster non-inflationary growth in a stable and sustainable manner
according to the needs and available instruments in our respective countries, including
through monetary and fiscal policy."
Distinguished Guests,
As concerns over inflationary pressures have subsided all over the world, maintaining the
smooth functioning of financial system and efficiency of credit markets has become the main
priority of policy makers. It will be proper to evaluate the recent developments in Turkish
economy in this perspective.
In Turkey, the banking system has been relatively prepared for the current crisis in terms of
foreign exchange liquidity. Its foreign exchange short position is also well contained. Foreign
exchange position of the public sector is almost negligible. The household sector is net
creditor in terms of foreign exchange, while real sector is net debtor.
Since securitized products are rarely used in the Turkish banking sector, the ongoing
financial turmoil has not put a marked pressure on local banks through that channel.
Current account deficit, historically a source of vulnerability for the Turkish economy, is likely
to experience a sharp drop in the upcoming period due to correction in commodity prices,
slow down in economic activity and depreciation in New Turkish Lira.
Still, extraordinary fluctuations in global liquidity conditions have adversely affected Turkey
like other countries, which are sensitive to international financial developments.
At this point, I would like to emphasize that we will continue to take the necessary measures
to contain the adverse effects of the global financial turmoil on the domestic economy,
provided that they do not conflict with the price stability objective.
The general framework of the Central Bank's liquidity management is fairly flexible and
wellstructured to fulfill its lender-of-last resort role and meet both New Turkish Lira and foreign
exchange liquidity requirement of the banking system effectively.
We will not allow any setback in New Turkish Lira money markets and will ensure smooth
operation of payment system. In this context, judging that inflation will display a more rapid
fall than envisaged before, the Monetary Policy Committee has decided to lower the
borrowing rates by 50 basis points on November 19, 2008. In addition, the margin between
the lending and borrowing rates was reduced by a further 50 basis points in order to contain
the potential volatility in short term interest rates.
Dear Guests,
The Central Bank of Turkey is aware of the significance of foreign exchange liquidity in the
banking system and progressively puts into effect necessary measures in order to get
through this period with minimal damage.
Accordingly, the Central Bank resumed its activities as an intermediary in Foreign Exchange
and Banknotes Markets as of 9 October 2008 and later raised transaction limits in the
Foreign Exchange and Banknotes Markets to USD 10.8 billion. Along with the above
mentioned measures, in order to ensure orderly liquidity flow in the financial system and
efficient functioning of credit markets by stimulating an increased foreign exchange liquidity
flow in the interbank foreign exchange market, effective as of today the Central Bank has
decided:
a) To extend the maturity of the FX deposit borrowed by the Banks within the
predetermined borrowing limits from one week to one month,
b) To reduce the lending rate from 10 percent to 7 percent for USD and 9 percent for
Euro in the said market.
In this challenging environment the way developing countries use their foreign currency
reserves is of utmost importance. The Central Bank of Turkey, if deemed necessary, will
continue to take additional measures prudently within its means in order to ensure the
smooth functioning of the FX market and to support FX liquidity.
Dear Guests,
I would like to conclude my speech by giving some information about this conference
organized with the aim of discussing the effects of globalization on monetary policy and
inflation. The first session today will examine the linkages between globalization, monetary
policy and financial stability. In the afternoon, second and third sessions will analyze the
impact of globalization on inflation and business cycles. Sessions on Saturday will be more
policy oriented. In the morning session, speakers will look at the topic of globalization and
monetary policy challenges faced by emerging market economies. Then we will conclude
with a panel on the recent global financial turmoil and its policy implications.
Once again I extend my warm welcome to all participants. I also want to thank the
distinguished participants for their valuable contributions. I hope you enjoy both the
conference and your stay in Istanbul.
Thank you.