Durmuş Yılmaz: Turkey's monetary and exchange rate policy for 2009
Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at
the Central Bank of the Republic of Turkey, Ankara, 16 December 2008.
* * *
General framework of the monetary policy
Overview
Assessing the monetary policy decisions of CBT in relation to the developments in the last
three years, it is of importance to fully comprehend the strategy to be implemented in the
upcoming period. Therefore, before covering the operational framework of the monetary and
exchange rate policy for 2009, it is better to provide a general evaluation of the
inflationtargeting regime, which has been implemented for the last seven years since 2001.
Between 2002-2005, the Central Bank implemented an implicit inflation-targeting regime
under which short-term interest rates were used as the main policy tool. Following the
achievements in the fight against inflation, decision-making processes gradually became
more transparent and foreseeable, thus, finally in 2006, the transition to an explicit
inflationtargeting regime was announced. The adoption of the explicit inflation-targeting regime
coincided with a period when the global conjuncture was undergoing rapid changes, as a
consequence of which; the Turkish economy faced a series of shocks. As a matter of fact,
when we look at the 2006-2008 period, it is evident that factors hindering the decline in
inflation mostly stem from the developments beyond the domain of monetary policy. These
shocks, of which some have prolonged impacts, caused inflation to exceed the targets during
this period (Chart 1).
Chart 1. Inflation developments in Turkey between 2002-2008
(*) November inflation rate was used for 2008.
Source: TURKSTAT and CBT.
The first serious shock to the inflation-targeting regime in Turkey arose upon a time when
international capital conditions changed to the disadvantage of developing countries and
capital outflow was experienced in many countries including Turkey, from May 2006
onwards. In this period, depreciation of the New Turkish Lira (TRY) around 30 percent and
the lack of confidence created by financial turbulence combined with sharp increases in food
prices due to drought led inflation rates increase and inflation expectations exceed the
targets considerably. In order to avoid any permanent effect on pricing behaviors, the Central
Bank tightened monetary policy significantly and took a series of additional policy measures.
These measures varied from suspending foreign exchange buying auctions to several
arrangements regarding TRY and foreign exchange liquidity. Even though the gap between
inflation expectations and inflation targets widened following fluctuations, inflation and
inflation expectations were to a great extent brought under control, owing to the measures
taken.
In the period covering 2007 and onwards, the main factors impeding the disinflation process
were sharp increases in oil and other commodity prices in the international markets along
with adjustments in administered/directed prices. The significant weight of food prices within
the Consumer Price Index (CPI) in Turkey - as is the case in many developing countries -
increased the volatility of inflation.
In 2007 and onwards, rapidly increasing food and energy prices in the international markets
caused inflation to display an upward trend on a global scale. As a matter of fact, by
November 2008, inflation rates in all developing countries - apart from Brazil - implementing
inflation-targeting regimes exceeded inflation targets by a significant margin (Chart 2). This
observation confirms the fact that the relatively high inflation figures of 2007 and 2008 in our
country should be assessed mostly as a reflection of global factors.
Chart 2. Inflation targets and realizations in the developing countries
18
16
November 2008
14
Inflation
12
10
Target Band
8
6
4
2
0
Rep.
Rep. Peru
Chile
Brazil
Israel*
Korea* Turkey Africa*
Mexico
Iceland*
Poland* Hungary
Colombia
Romania*
Guatemala
Czech
Philippines*
Slovak
South
The
* As of October 2008
Source: Central Banks, IFS, TURKSTAT, and CBT.
As inflation remained significantly above targets for a protracted period, it entailed the
Central Bank to pursue an efficient communication strategy. In this context since 2007, when
supply shocks became more apparent, the Central Bank has highlighted core inflation
indicators excluding energy and food prices and has frequently referred to them. It was
emphasized in this period that, despite the upward trend of inflation, there was no pressure
on core inflation indicators and that prices, which were not directly affected by supply shocks,
did not display high increases. Under the assumption that the hike in energy and food prices
is temporary, and thus inflation shall resume its downward trend, the aim was to direct the
focus of economic agents to the medium-term in order to avoid undesired fluctuations in
economic activity. At first, this approach was successful in containing inflation expectations.
However, the fact that shocks were more persistent than expected caused the rise in food
and energy prices to influence prices in general and an increase was observed in core
inflation indicators. In early 2008, when turbulence in the global markets that started in
summer 2007 was combined with domestic political uncertainties, significant depreciation
was observed in the Turkish Lira and it became considerably difficult to push inflation
expectations down to levels consistent with the previously set inflation target of 4 percent.
Although not attaining inflation targets stems from factors beyond the domain of monetary
policy, overshooting of inflation target for two consecutive years and also the expectation of
overshooting 2008 target have undermined the role of inflation targets as an anchor for
inflation expectations. In fact, studies within our Bank indicate that gradually more weight is
attached to past inflation in forming expectations and as of mid-2006 inflation expectations
have become more susceptible to variables like exchange rate and risk premium. According
to the Central Bank, if this situation becomes permanent, the cost of fighting inflation will
increase. Therefore, in an open letter to the Government in June 2008 the Central Bank
proposed setting new targets for the medium term in order to control inflation expectations
and to re-establish the reputation of the implemented regime. The Government accepted this
proposal and the inflation targets for 2009 to 2011 were revised as 7.5, 6.5, and 5.5 percent,
respectively. Hence, the inflation targets to be used as a reference by economic agents to
form their expectations were set with the objective of containing inflation expectations and
reducing the cost of the fight against inflation.
Bearing in mind that altering inflation targets might lead to the deterioration in the inflation
expectations in the short run, the Central Bank implemented the target revision along with
monetary tightening. Thereby, the negative impact that might be created by the upward
revision of targets has been contained. As a matter of fact, during the period of target
revision, a slight deterioration was observed in the medium-term inflation expectations but
with diminishing political uncertainties and monetary tightening, inflation expectations have
been contained (Chart 3).
In the last quarter of 2008, the aggravated lack of confidence in the global financial markets
had unfavorable effects on the global liquidity flow and created an extraordinary demand
especially for US dollar liquidity. This led to significant depreciation of the TRY, as was the
case for currencies of other developing countries. Despite these developments in the
exchange rate, slowdown in total demand and the decline in commodity and food prices
affected inflation outlook positively, which provided room to maneuver for monetary policy.
Against this backdrop, the Central Bank has taken several measures to support the liquidity
of the financial system and to ensure the efficient functioning of the credit markets.
Chart 3. Inflation expectations for the next 12 and 24 months
10
Target
12 Months 24 Months
9
Revision
8
7
6
5
4
Eyl.05 Eyl.06 Eyl.07 Eyl.08
Mar.05 Kas.05 Mar.06 Kas.06 Mar.07 Kas.07 Mar.08 Kas.08
Oca.05 Oca.06 Oca.07 Oca.08
May.05 May.06 May.07 May.08
Tem.05 Tem.06 Tem.07 Tem.08
Source: CBT.
Since the Central Bank can directly control New Turkish Lira liquidity, it can support smooth
functioning of financial and credit markets by providing the required liquidity. As for foreign
exchange liquidity developments however, external conditions are more influential. In fact, in
a period when uncertainties surrounding the global economy are at high levels, the Central
Bank adopted the strategy to use foreign exchange reserves to primarily support the foreign
exchange liquidity of our banking system. Within this framework, the Central Bank resumed
its activities as an intermediary in the Foreign Exchange Deposit Market; lending rates of this
market was reduced and maturities were extended. Besides, during periods of ailing price
movements, foreign exchange liquidity was injected via foreign exchange selling auctions.
Moreover, it has been declared to the public that if deemed necessary, additional measures
might be taken to ensure that the financial markets function efficiently.
All these measures have helped contain the effects of the global financial turmoil on the
domestic economy. The Central Bank will continue to take the necessary measures,
provided that they do not conflict with the price stability objective.
In the last quarter of 2008, global financial conditions have been tighter than required by the
stance of monetary policy, owing mainly to the intensification of the global financial crisis.
Turkey has also been undergoing a similar process. In this context, the Central Bank recently
made a measured cut in short-term interest rates, in order to offset the extra tightening in
monetary conditions.
In order to be able to comprehend the monetary policy decisions of the Central Bank, the
nature of the shocks to the economy should be analyzed properly at the outset. For instance,
while an unexpected and strong monetary tightening was implemented in the face of capital
outflows in the May-June 2006 period, an expansionary monetary policy was adopted
following capital outflows in the last quarter of 2008 (Chart 4). The contradiction between
these two responses can be explained mainly by the significant differences between the said
two periods in terms of both economic conjuncture and the sources of the shocks. As both
domestic demand and external demand were strong in 2006, the exchange rate movements
triggered by capital outflows had the potential to rapidly damage disinflation and inflation
expectations. However, in 2008, it is observed that the downward pressure of the global
recession and weak domestic demand conditions on the inflation has come to the forefront.
Chart 4. Policy rates and market interest rates in the 2006-2008 period
26
Policy Rate (Compound)
June 2006
24
Secondary Market Benchmark Interest Rate
(Compound)
22
20
18
16
14
November 2008
12
16.01.2006 28.02.2006 12.04.2006 26.05.2006 10.07.2006 22.08.2006 05.10.2006 22.11.2006 09.01.2007 21.02.2007 05.04.2007 18.05.2007 02.07.2007 14.08.2007 27.09.2007 13.11.2007 28.12.2007 12.02.2008 26.03.2008 09.05.2008 24.06.2008 06.08.2008 18.09.2008 06.11.2008
Source: CBT and ISE.
In sum, it is seen that the inflation-targeting regime has provided a significant amount of
flexibility to take the necessary measures in the face of high-level shocks. When the course
of medium-term inflation expectations is analyzed, it is observed that the expected inflation
continues to remain well below the actual inflation figures although inflation had clearly
remained above the target level for quite some time. When considering the period of high
inflation levels experienced by Turkey in recent years, one of the most significant
achievements of the inflation-targeting regime has been its success in managing
expectations in a time of extraordinary shocks.
Operational framework for monetary policy
Inflation targets
Inflation targets have been set jointly with the Government as "point target" since 2006, over
the end-year inflation rates calculated by the annual percentage change of the Consumer
Price Index (CPI) for a target horizon of three years. As mentioned above, targets for the
next three-year period were announced during the revision in June 2008. Within this
framework, inflation targets for 2009, 2010 and 2011 are 7.5 percent, 6.5 percent and 5.5
percent, respectively.
Accountability
In the first three-year period of the inflation-targeting regime, the Central Bank explained the
reasons for deviations from inflation targets and policy measures taken with open letters sent
to the Government, and hence meticulously applied the principle of accountability. Gradually,
Inflation Reports also became a significant support to the accountability mechanism.
It is stipulated in Article 42 of the CBT Law that "The Bank shall submit information to the
Government in writing and inform the public disclosing the reasons of incapability to achieve
the determined targets in due time published or the occurrence of the possibility of not
achieving and the measures to be taken thereof". Implementation details regarding the
specification of the extent of the deviation from the target that require explanation are left to
the discretion of the Central Bank. In this respect, the Central Bank sets an uncertainty band
around the target and enforces the accountability mechanism in case figures breach this
band.
The uncertainty band for 2009 has been maintained at two percentage points around the
target. In this context, a path consistent with the end-year target has been established for the
end of each quarter. The figures to be used as a reference for accountability throughout 2009
can be found in Table 1.
Table 1: 2009 Inflation path consistent with the end-year target and the uncertainty
band
March June September December
Uncertainty Band 11.70 10.80 10.50 9.50
(Upper Limit)
Path Consistent with the 9.70 8.80 8.50 7.50
Target
Uncertainty Band 7.70 6.80 6.50 5.50
(Lower Limit)
In case end-of-quarter inflation figures breach the band specified in Table 1, the Central
Bank will disclose the reasons for the deviation in the quarterly Inflation Report, together with
the measures already taken as well as those to be taken to attain convergence to the target.
Thus, the Inflation Report will also have an important role as the main tool of the
accountability mechanism. In case the end-year inflation deviates more than two percentage
points in either direction, the Central Bank will draft a detailed letter to the Government and
share this letter with the public.
At this point, it should be emphasized once more that the Central Bank does not have any
targets for quarterly basis and the official target announced is the end-year inflation target.
Therefore, it should be underlined that the end-of-quarter figures specified above have been
set only to facilitate the accountability mechanism and should not be perceived as interim
targets.
Inflation forecasts and monetary policy stance
With the adoption of the inflation-targeting regime, medium-term inflation forecasts started to
be included in Inflation Reports issued since 2006. In addition to these forecasts, reports also
provide information regarding the envisaged course of monetary policy. Since 2007, inflation
forecasts, which extended to eighteen-month periods at the outset, started to cover a
twoyear time-span.
In the face of the extraordinary supply-side shocks experienced since the last quarter of 2007
and with a view to improving the predictability of monetary policy, since April 2008, the
Central Bank has added projections to the baseline scenario under alternative scenarios
based on the food and energy prices. Moreover, the forecast horizon has been extended to
three years for economic agents to have a clearer vision of the future and develop a
longerterm perspective.
The main objective of sharing inflation forecasts and the likely policy stance with the public is
to promote main principles of inflation targeting; i.e. transparency and foreseeability. Such an
approach has helped strengthen the monetary transmission mechanism via expectations
channel in recent years. However, the Central Bank preferred to avoid providing hints on the
course of short-term interest rates in the recent period, as monetary policy now needs to be
relatively more flexible given the current conjuncture with exceptional uncertainties in the
global economy. It should be underlined that this is a temporary situation and the
predictability of monetary policy will increase in the upcoming period when the stability in the
global economy is restored
Decision-making process and the communication policy
The Monetary Policy Committee (MPC) will continue to meet once a month in 2009 as well,
in accordance with the schedule announced beforehand. Monetary policy decisions at these
meetings and their rationale will be made public on the website of the Central Bank in a
press release posted at 7:00 p.m. on the same day. As in the previous year, the summary of
the MPC Meeting will be released on the website of the Central Bank within eight working
days, along with its English translation.
As in previous years, the Inflation Report, which is the main communication tool of the
monetary policy, will be published quarterly and introduced to the public at a press
conference. The biannual presentations made by the Governor before the Council of
Ministers and the Planning and Budget Commission of the Grand National Assembly of
Turkey - to provide information about the activities and monetary policy implementations of
the Bank -; monthly "Price Developments" reports issued on the next working day of the
release of the inflation figures; "Financial Stability Report" issued biannually; press releases;
and presentations and speeches made by the Central Bank authorities in Turkey and abroad
will play important role in informing the public.1 Working papers, booklets, technical notes
published and conferences and workshops arranged by the Bank will also continue to be
used as effective tools of the communication policy.
Exchange rate policy and liquidity management
Exchange rate policy
Along with inflation targeting, the Central Bank will continue to implement the floating
exchange rate regime in 2009. As stated in the annual monetary and exchange rate policy
announcements, which have been published since 2002, the foreign exchange rate is not a
policy tool or target under this regime and it is determined by the supply and demand
conditions in the market. Whereas the main factors affecting foreign exchange supply and
demand are the monetary and fiscal policies implemented, international developments,
economic fundamentals and expectations.
Although there is no exchange rate level to be maintained in a floating exchange rate regime,
a strong foreign exchange reserve position is very important for emerging economies like
Turkey to eliminate the unfavorable effects of potential internal and external shocks and to
boost the confidence in the country. Therefore, the Central Bank holds foreign exchange
buying auctions to build up reserves at times where foreign exchange supply increases
relative to the foreign exchange demand.
As meticulous in minimizing the impact on supply and demand conditions in the foreign
exchange market, the Central Bank has been buying foreign exchange via transparent
foreign exchange buying auctions with pre-announced terms and conditions. Although the
aim is to run auctions according to the pre-announced program, in case of unexpected
significant developments pertaining to the foreign exchange supply, amendments to the
auction programs can be made with prior notice.
Accordingly;
(i) The maximum amount to be purchased in daily foreign exchange buying auctions
was set as USD 90 million for 2008, with USD 30 million for the auction amount and
USD 60 million for the optional selling amount.
(ii) However, as a result of the increased exchange rate volatility in our foreign
exchange market parallel to the increased expectations of a possible stagnation in
developed economies, the maximum daily amount to be purchased was reduced to
USD 45 million, with USD 15 million for the auction amount and USD 30 million for
the optional selling amount, as of 10 March 2008.
(iii) Meanwhile, the Central Bank has implemented a set of measures since October,
with the aim of abating potential problems in the Turkish financial markets that may
arise from global developments. Within this scope, foreign exchange buying
auctions were suspended as of 16 October 2008 in order to keep the liquidity, which
is permanently withdrawn from the foreign exchange market through foreign
exchange buying auctions, in the system, and hence, to further enhance the liquidity
conditions of the Turkish banks.
In addition to the suspension of the foreign exchange buying auctions, the Central Bank
started to inject foreign exchange liquidity into the market through foreign exchange selling
auctions as of 24 October 2008 as unhealthy price formations were witnessed due to a
decrease in the depth of the foreign exchange market. The daily amount of the foreign
exchange to be sold via auctions was set as USD 50 million, which could be raised on the
days of the auction when deemed necessary. It was also announced to the public that
depending on developments in the foreign exchange market, the daily auction amounts might
be changed and the auctions might also be suspended, when deemed necessary. As a
matter of fact, after the auctions held on two working days, the Central Bank suspended the
foreign exchange selling auctions on 30 October 2008 as a result of easing concerns
pertaining to the depth of the foreign exchange market, which was also facilitated by
favorable developments in the global markets.
Hence, in 2008, while the total amount of foreign exchange purchased via buying auctions
reached USD 7.584 million, USD 100 million was sold through two foreign exchange selling
auctions. There has not been any direct intervention in the foreign exchange market. The
total amounts of foreign exchange purchased and sold by the Central Bank from 2002
onwards are shown on a yearly basis in the table given below:
Table 2: The Central Bank's foreign exchange purchases and sales
(2002-2008; USD million)
FX Buying FX Selling FX Buying FX Selling Total Net FX
Auctions Auctions Interventions Interventions Buying
Year
2002 795 -16 12 799
2003 5.652 -4.229 - 9.881
2004 4.104 -1.283 9 5.378
2005 7.442 -14.565 - 22.007
2006 4.296 1.000 5.441 2.105 6.632
2007 9.906 -- 9.906
2008* 7.584 100 -- 7.484
Total 39.779 1.100 25.534 2.126 62.087
As of 15 December 2008
Problems in the international credit markets have heightened since the second half of
September due to increased concerns over the credibility of the financial system, thus
leading to liquidity problems in many countries. During this period, the Central Bank adopted
the following regulations in order to ensure the efficient functioning of the foreign exchange
market and to strengthen foreign exchange liquidity in the banking system in case of liquidity
problems:
(i) On 9 October 2008, the Central Bank resumed its intermediary activities in the
foreign exchange deposit markets in Foreign Exchange and Banknotes Markets with
a view to contributing to the enhancement of the mobilization of foreign exchange
liquidity in the Interbank Foreign Exchange Market.
(ii) Transaction limits for the banks in the Foreign Exchange and Banknotes Markets
were revised on 14 October 2008 and limits were doubled for each bank on 24
October 2008 to reach a total of USD 10.8 billion.
(iii) On 21 November 2008, the maturity of the FX deposit borrowed within
predetermined borrowing limits by the Banks from the Foreign Exchange Deposit
Markets in terms of USD and Euro was extended from one week to one month and
the lending rate that had been previously set as 10 percent in the said market was
reduced to 7 percent for USD and 9 percent for Euro.
(iv) On 5 December 2008, the FX required reserves ratio dropped from 11 percent to 9
percent, providing the banking system with an additional foreign currency liquidity
amounting to USD 2.5 billion.
In such a challenging environment, efficient utilization of foreign exchange reserves by
developing countries assumes the utmost importance. Taking into consideration of this, the
Central Bank, when deemed necessary, will always continue to take additional measures
within its means prudently in order to ensure the smooth functioning of the FX market and to
support FX liquidity. In this framework, in the event of further intensifying of the financial
turmoil in global markets that might have negative impacts on the Turkish economy;
(i) Under the basic principles of the floating exchange rate regime, if unhealthy
fluctuations are witnessed in the foreign exchange market due to a decrease in the
depth of the market foreign exchange selling auctions will be held
(ii) Transaction limits for banks in the Foreign Exchange and Banknotes Markets will be
raised,
(iii) The FX required reserve ratio might be further reduced to a limited extent.
The Central Bank will continue to closely monitor exchange rate developments in 2009 and
will directly intervene in the market in case of any unhealthy fluctuations in the exchange
rates due to speculative behavior stemming from a decrease in the market depth.
Moreover, the purchase/sale transactions of "foreign exchange against foreign exchange,"
"foreign exchange against foreign banknotes" and "foreign banknotes against foreign
banknotes" conducted between the Central Bank and institutions authorized to operate in the
Foreign Exchange and Banknotes Markets will continue in 2009.
In case of a recovery in the liquidity conditions due to developments in the international
markets;
(i) The Central Bank may, with prior notice, resume foreign exchange buying
auctions in line with the general strategy of strengthening foreign exchange
reserves at times when foreign exchange supply increases compared to the
foreign exchange demand.
(ii) The Central Bank might cease to perform its intermediary function in the
Foreign Exchange Deposit Market. However, even in such a case, banks
will still be able to borrow foreign exchange deposits from the Foreign
Exchange Deposit Markets within the predetermined borrowing limits.
(iii) The FX required reserves ratio might be increased.
In view of the fact that financial stability is one of the prerequisites for price stability, the
Central Bank took the necessary measures in order to ensure the efficient operation of
Turkey's foreign exchange market without facing any liquidity problems. The Central Bank
also announced possible additional measures. Nevertheless, bearing in mind that under the
current exchange rate regime economic agents operate in an environment of exchange rate
risk, they should establish mechanisms that will ensure efficient risk management.
Liquidity management
While drawing up the general framework of liquidity management, the Central Bank took into
consideration following objectives;
(i) ensuring that short-term interest rates would remain at or revolve around the level set by
the Committee, (ii) ensuring the efficient and stable operation of money markets by
preventing excessive volatilities in short-term interest rates of the money market, (iii)
ensuring smooth functioning of the payments system. (iv) providing the operational structure
with sufficient flexibility against unexpected developments in the markets.
Another important factor that determines the general framework of the Central Bank's
liquidity management is the level of liquidity in the market.
The main factors that directly affect the liquidity in the market are as follows:
(i) Changes in monetary base, (ii) The Central Bank's foreign currency purchase/sales
transactions, (iii) Interests paid/collected by the Central Bank for open market operations and
interests paid by the Central Bank for TRY reserve requirements, (iv) The Treasury's primary
surplus, (v) The spread between the Treasury's redemption and issue of net TRY
government bonds, excluding the Central Bank, (vi) Privatization and SDIF-related TRY
transfers to the Treasury.
In addition, as Treasury determines the TRY-denominated borrowing requirement, the
Treasury's net FX-denominated collections or payments including domestic and external
borrowing, the Treasury's redemption to the CBRT and CBRT profit transfers can all
indirectly affect TRY liquidity in the market.
Excess liquidity conditions, which were created by government bonds bought by the Central
Bank in 2001 from public banks and banks within the SDIF, and later by large amounts of FX
purchase, prevailed in the market until May 2008. The liquidity shortage that emerged in the
market in May 2008 continued for the rest of the year. The Central Bank withdrew the excess
liquidity in the market mainly via New Turkish Lira deposit transactions in the Interbank
Money Market within the CBRT and reverse repo transactions in the Repo and Reverse
Repo Market of the Istanbul Stock Exchange, on an overnight basis. Following the liquidity
shortage of May 2008, the Central Bank started to meet liquidity requirements via regular
one-week repo auctions. Meanwhile, due to the fact that some banks preferred to lend their
excess liquidity to the Central Bank in the Interbank Money Market owing to factors such as
transaction costs and tax differences as long as interest rates in the secondary market did
not significantly exceed the Central Bank borrowing rate, the Central Bank injected liquidity to
the market via one-week auctions on the one hand, and made overnight borrowings on the
other hand. Hence, the Central Bank prevented overnight interest rates to significantly
surpass the Central Bank's overnight borrowing rate, a reference rate for monetary policy,
thus ensuring the efficient distribution of liquidity in the banking system. Thus, the borrowing
rate of the Central Bank has continued to be the benchmark interest rate for markets.
At end-2007, the Central Bank withdrew total liquidity of TRY 3.9 billion including TRY 2.9
billion at overnight maturity and TRY 1.0 billion via liquidity bills. At the end of November
2008, the Central Bank injected TRY 19 billion worth of liquidity to the market via one-week
repo auctions and withdrew TRY 8.6 billion at overnight maturity. Hence, the excess liquidity,
which was TRY 3.9 billion at end-2007, turned into a liquidity shortage of TRY 10.4 billion at
the end of November 2008. As a result, liquidity in the market dropped by TRY 14.3 billion
(Table 3).
Table 3: Changes in liquidity (Billion TRY)
31.12.07 28.11.08 Change
3.9 -10.4 -14.3
Liquidity in the market
0.0 - 19.0 -19.0
Funded via 1-Week Repo Auctions
2.9 8.6 5.7
Withdrawn in IMM and ISE at Overnight Maturity
1.0 0.0 1.0
Withdrawn via Liquidity Bills
The main items affecting liquidity in the market in 2008 are given in Table 4.
Table 4: Factors affecting liquidity (Billion TRY)
31.12.07 28.11.08 Impact
46.3 56.8 -10.5
Monetary Base
27.4 33.3 -5.9
Currency Issued
18.9 23.5 -4.6
Free Deposits
CBRT Operations Affecting Liquidity in the 11.0
Market
9.1
FX Purchase against TRY
1.9
CBRT Interest Payments
Public Operations (excl. redemptions to -14.8
CBRT)
Redemption of net TRY government bonds 18.9
(redemption-issue)
-28.9
Primary surplus inflow
TRY denominated privatizations and other -4.8
operations
Accordingly, while the Central Bank's foreign exchange purchases and interest payments
boosted liquidity by TRY 11 billion in 2008, the Treasury's operations amounting to TRY 14.8
billion and the TRY 10.5 billion increase in monetary base eroded liquidity by a total of TRY
25.3 billion.
Significant uncertainties exist regarding liquidity conditions in 2009. The reason is that the
Central Bank's foreign currency purchase/sale operations against TRY and the Treasury's
net foreign exchange collections or payments are not yet clear, and the realizations can also
be different from the envisaged within the year. Under the assumptions that the Central Bank
will not conduct foreign currency purchase/sale operations against TRY and that the
Treasury will act as net foreign currency payer at a reasonable level, it is predicted that
though the liquidity shortage in the market will be at moderate leve