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.

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.