during the crisis. The purpose was to normalize the operational framework of monetary policy. As a result of the favorable developments in credit markets and the recovery in economic activity, the bank withdrew the temporary liquidity measures it had introduced during the crisis and raised required reserve ratios. The details of the Exit Strategy and the related Central Bank policies are as follows:

- Measures were taken for gradually reducing excessive Turkish lira and FX liquidity: Required reserve ratios for both TL and FX were raised.

- Remuneration of required reserves held at the Central Bank was halted.

- As a result of the cutback in the excess funding amount, the interest rate of one week repo auctions started to increase. Then, the second stage of the exit strategy was initiated, and the first step of the technical interest rate adjustment process was taken in May 2010. The oneweek repo rate became the new policy rate.

- An interest rate corridor (the difference between overnight lending and borrowing rates) was introduced for more effective liquidity management purposes.

- The intermediary function of the CBRT in the foreign exchange deposit market was abolished. (However, banks would still be allowed to borrow foreign exchange deposits from the CBRT within the predetermined borrowing limits. Nevertheless, the maturity of these transactions was decreased from three months to one week.)

- The three-month repo auctions were terminated with the consideration that the liquidity shortage would diminish and the need for longer term funding would decrease due to the continuation of the CBRT’s foreign exchange purchases.

In addition to the monetary policy exit strategy, the Central Bank accelerated reserve accumulation to contribute to financial stability. In order to be able to adapt to the rapidly changing structure of capital flows, the bank also adopted a more flexible method for foreign exchange buying auctions from October 2010 onward. Moreover, the bank introduced further measures to direct the capital inflows driven by global monetary expansion to longer-maturity investments.

It is widely accepted that a high current account deficit may threaten financial stability in case of a sudden stop or reversal of capital inflows. Turkey’s current account deficit has widened sharply on the back of continued revival in domestic demand and imports as well as higher energy prices as the recession was left behind and as the country resumed fast economic growth. The 12-month current account deficit had reached US$68.1 billion as of May 2011. It is worth noting that in addition to the role of credit growth in fuelling import demand, Turkey’s dependence on imported energy leaves it vulnerable to the volatility of global energy prices. A recent IMF report prepared for the G20 in July 2011 estimated that the current account deficit-toGDP ratio would reach 10.5 percent in Turkey at the end 2011.<sup>7</sup> Although the current account

> 7 Participants of the Expectations Survey (July 2011) of the CBRT expect the current account deficit to be US$68.1 billion as of the end of 2011 (8.7 percent of estimated GDP for 2011 in the Medium-Term Programme) and US$62.5

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