Besides these measures, with an extensive arrangement made in December, the TL required reserve ratios were differentiated by maturity and the reserve requirement base was expanded to include certain foreign and domestic repo transactions which were formerly not subject to reserve requirement. This arrangement aims to reduce maturity mismatch in banks’ balance sheets by extending the maturity of banking sector liabilities and also aims to encourage long-term capital flows. 46. The ongoing strong course of credits as well as other domestic demand indicators in March implied that additional monetary tightening would be necessary. The CBRT assessed that implementing monetary tightening through reserve requirements, rather than using policy rates, would be more effective in containing macro financial risks resulting from the divergence of domestic and external demand. In this respect, the CBRT decided to deliver a notable hike in the weighted average of required reserve rates on short term liabilities. Accordingly, TL required reserve ratios for sight deposits and short-term deposits/participation accounts and other liabilities were raised. Our measures regarding the required reserves are displayed on the slide. With the last arrangement to be effective as of April 15, 2011 in addition to prior adjustments since October 2010, a total of TL 38 billion liquidity will have been withdrawn from the market. 47. Our measures are expected to have an impact on domestic demand and credits starting from the second quarter. The adopted policy measures ultimately aim to contain macro financial risks by inducing a more balanced growth path for aggregate demand components.

Moreover, in view of the improved international liquidity conditions and the increase in foreign exchange liquidity of the banking system, our Bank has terminated its intermediary role in the Foreign Exchange Deposit Market as of October 15, 2010. In addition, the maturity of the foreign exchange deposits borrowed within the pre-determined borrowing limits by banks from the CBRT was reduced to one week, as was the case before October 2008. Distinguished Guests, 43. The quantitative easing adopted in the last quarter of 2010 by some major central banks and the consequent boost in capital flows to emerging markets have necessitated significant changes to our monetary policy strategy. Short-term capital inflows feeding the divergence between domestic and external demand caused current account deficit to widen rapidly, thus necessitating macroprudential measures. Hence, we jointly use liquidity management facilities and reserve requirements as well as policy rates in order to achieve price stability and financial stability. 14  BIS central bankers’ speeches  44. In line with the new policy design, the TL required reserve ratio was raised by 0.50 points each in September and November to 6 percent. Additionally, in order to more effectively use the required reserve ratio as a tool to contain macroeconomic and financial risks, interest payments on TL reserve requirements was terminated in September. 45. Due to the accelerated capital inflows, our Bank reduced its overnight borrowing rate from 5.75 percent to 1.50 percent in November, and increased the lending rate by 0.25 points to 9 percent. Late liquidity window rates were accordingly revised.