Rise in the liquidity shortage causes the interest rates of repo auctions to become reference rates for the markets. The permanency of such conditions leads to an involuntary tightening of monetary policy because of the realization of the said interest rates above the Central Bank’s overnight borrowing rates. In order to avoid potential negative impacts of such a situation, interest rates of one-week repo auctions will be set as the reference rate for monetary policy operations, in the event of an increase in liquidity shortage and/or having high probability to become permanent. Furthermore, the Central Bank’s overnight borrowing and lending rates will be revised downward with a view to eliminating any probable impact of this change in the operational structure on the monetary policy stance. In other words, this interest rate cut should not be perceived as loosening monetary policy, but merely as a technical adjustment resulting from the permanent change in liquidity conditions. 12  BIS Review 3/2009  Operational framework for liquidity management If the technical interest cut mentioned above does not materialize, the 2009 liquidity management strategy will be as follows: (i)  The Central Bank will continue to announce overnight borrowing and lending rates between 10:00 a.m.– 12:00 p.m. and 1:00 p.m. – 4:00 p.m. in the Interbank Money Market within the Central Bank. In case of a liquidity shortage during the day, banks will be able to borrow at the Central Bank’s lending rate against collateral within their limits.

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.