Country Report Turkey January 2011

Economic policy: Capital inflows prompt a shift in monetary policy

A combination of loose global liquidity, strong short-term capital inflows, rapid credit growth, strong domestic demand, weak external demand and a large current-account deficit has forced the Central Bank of Turkey to alter its monetary policy stance to reduce financial risks. At its monthly meeting on December 16th, the Monetary Policy Committee (MPC) reduced the main policy rate, the weekly repo (repurchase) lending rate, from 7% to 6.5%, further increased the spreads between its overnight lending and borrowing rates, and recommended changes in required reserve ratios, with higher requirements for short-term liabilities. On December 17th the Central Bank duly announced new required reserve ratios for lira deposits, ranging from 5% for deposits of one year or more to 8% for deposits of one month or less. Previously, reserve requirements were 6% for all maturities. The new reserve requirements are to apply to repo agreements for domestic and non-resident customers as well as to deposits. Banks were also forbidden to pay more than 0.25% interest on current accounts. Reserve requirements on foreign-currency deposits were left unchanged, for the time being, at 11%.

On December 21st the governor, Durmus Yilmaz, announced the Central Bank’s monetary and foreign-exchange policies for 2011. He made clear that the Bank was prepared to continue its recent policies directed towards reducing financial risk. The amount of its daily foreign-exchange purchases will rise as of January 3rd 2011, from US$40m to US$50m.

The Central Bank expects that higher reserve requirements will offset the loosening effect of its decision to lower its main policy rate. It estimates that the changes in the levels and scope of reserve requirements announced on December 17th will reduce market liquidity by TL7.6bn (US$5bn) and US$200m. The Bank appears confident that the interest rate cut will not trigger a reversal of the recent downward trend of inflationary pressures. Its thinking in this respect may have been reinforced by the low inflation figure for November and the sharp slowdown in GDP growth during the third quarter of 2010 (see Economic performance).

Central Bank interest rates
Before Dec 16th, 2010After Dec 16th, 2010
Central Bank lends
Weekly repo7.06.5
Overnight—main rate8.89.0
Overnight—for market-maker banks7.88.0
Overnight—late liquidity window11.812.0
Central Bank borrows
Overnight—main rate1.81.5
Overnight—late liquidity window0.00.0
Source: Central Bank of Turkey.

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