- The share of Turkish lira swaps at longer maturities increased, while the share of short-term swaps declined significantly after the adoption of the new monetary policy.

- As the strategy to discourage short-term carry trade has been quite effective, there was a significant drop in the stock of short-term speculative inflows, mainly through cross currency swaps, which can be tracked via off-balance sheet positions following the adoption of the new policy mix.

- Consequently, appreciation pressures reversed and the behavior of the Turkish lira diverged significantly from the currencies of peer emerging economies, which is estimated to have contributed to an improvement in the current account deficit (annex figure 4).

# **_Conclusions_**

As indicated in the interest rate decision summary on July 21, 2011, due to the measures taken so far via the monetary policy, the domestic demand is now under control and the current account balance will start to improve in the final quarter of the year. According to the most recent credit growth data, as of July 15, 2011, annual credit growth was 35.7 percent,<sup>11</sup> which is still above the 25 percent target for the year end, but it shows that there is a slowdown in credit growth as desired by the CBRT (annex figure 5). Although the annual credit growth rate is still not at the target level, the acceleration in credit growth came to an end in the last few months. The tightening in credit supply conditions has continued in the second quarter of 2011 thanks to the measures taken by the CBRT and the BRSA. There has been a significant increase in credit interest rates recently. Hence credit growth is expected to decelerate in the second half of the year through the lagged effect of tightening in credit supply conditions. The credit growth rate in the first half of 2011 was around 17% and if the credits grow by around 7% as a result of the expected significant deceleration, the target growth rate of 25% may be achieved.

To sum up, the banking sector in Turkey became more and more resilient after 2001, with high capital adequacy, better managed risks, and high profitability. This outcome was one of the main reasons why Turkey left the global financial crisis of 2008 behind so quickly and strongly. Turkey had already experienced its own financial crisis in 2001 and had taken the necessary macroeconomic and regulatory steps to prevent another, while advanced economies accumulated financial risks and sovereign debt in the same period.

The recent global financial crisis was a litmus test that differentiated country economies with sound and prudent economic policies from those with unsustainable monetary, financial, and fiscal practices. The Turkish economy, which is in the former group, did suffer from the crisis, mainly due to the spillover effects from the biggest economies of the world. However, Turkey was also one of the countries that left the negative effects of the crisis behind faster and emerged stronger compared to both developed economies and many emerging market countries.

> 11 Although this figure is not much below the peak growth rate observed in total credits (36.5 percent), the acceleration in credits has been contained in the last few months.

12