Erdem Başçi: Recent economic and financial developments in Turkey Speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at the press conference for the presentation of the January 2013 Inflation Report, Ankara, 29 January 2013. *  *  *  Distinguished Guests, Welcome to the press conference held to convey the main messages of the first Inflation Report of the year. Today I will talk about recent global and domestic developments besides the CBRT’s inflation forecasts that are accordingly updated. I will now present an overview of the report, which will be published on our web-site shortly. The Report typically summarizes the economic outlook underlying monetary policy decisions, shares our evaluations on macroeconomic developments and presents our medium-term inflation forecasts which were revised in view of the developments in the last quarter, along with our monetary policy stance. In addition to the main text, the Report includes nine boxes entailing significant and up-to-date analyses on various topics. For instance, one of these boxes presents an analysis on the level of credit growth rate which will prove reasonable and healthy for Turkey in the period ahead. Moreover, there is a summary of two papers examining the effects of the CBRT’s latest policies on the expectations and volatility of the foreign exchange rate. In the Report, there are also analyses on the current account balance, global risks, accounting of inflation forecasts, tax adjustments on the tobacco products and the sensitivity of tax revenues on the economic circumstances.

Improved risk appetite and more effective use of the Reserve Options Mechanism (ROM) have allowed a gradual reduction in the upper bound of the interest corridor since September. Meanwhile, the liquidity provided for the market was further increased, driving overnight market rates close to lower bound of the corridor. Chart 7. Policy Rate and Liquidity Policies (Percent)  Source: ISE, CBRT. Capital inflows accelerated at the year-end upon the surge in global risk appetite coupled with a relative improvement in risk perceptions regarding Turkey. This contributed to a fasterthan-expected credit growth and appreciation pressures on the Turkish lira. I suppose you remember that we stated this as a possible risk scenario in the previous Inflation Report and listed possible measures we could take. Upon the materialization of these risks to a large extent, we launched the strategy we envisaged. In order to contain the risks on financial stability, the appropriate policy response would be to keep interest rates at low levels while sustaining macroprudential measures. In this respect, the policy rate and the corridor have recently been shifted down and a measured tightening has been implemented through reserve requirement policy. Despite the cut in short term interest rates, the CBRT maintained its cautious and flexible stance, which is worth noting. Thus, I would like to reiterate that the impact of the measures taken on credit, domestic demand and inflation expectations will be closely monitored and the amount of the Turkish lira funding will be adjusted in either direction, as needed. Chart 8. Chart 9.