Central Bank in Turkey

Topics: Monetary policy, Inflation, Foreign exchange market Pages: 77 (5206 words) Published: November 2, 2013
(Updated and revised as of July 2002)

August 2002



Outline of Presentation
Monetary Policy Framework – Exchange Rate Regime
Monetary Policy Strategies
Assumptions, Communication – Accountability, Transparency, Interest Rates Policies, Monetary Targets, Inflation Targeting

Current Situation and Expectations in Economy
Stability Indicators, Price Stability and Growth, Balance of Payments, Monetary Targets

Price Developments
January – June developments, price movements in the future

Outlook for Exchange Rate Policy
Outlok for TL Policy

Monetary Policy Framework
Exchange Rate Regime
Characteristics of the 2000 Monetary Policy and
Exchange Rate Regime
 It was based on a fixed currency peg exchange regime, daily

values of which being predetermined,
 The Central Bank’s influence over short-term interest rates

were limited.
While the Central Bank assumed the exchange rate risk,
the interest rate risk was borne by market.
 A gradual transition to floating exchange rate regime was


Monetary Policy Framework
Exchange Rate Regime
Under the free floating exchange rate regime;
 The Central Bank’s control over short-term interest rates has

been increased.
 Level of exchange rate has started to be determined

according to the supply-demand conditions of markets.
 In other words, while the Central Bank has begun giving

strong signals regarding short-term interest rates, the level of exchange rate has been left at the discretion of markets.


Monetary Policy Framework
Exchange Rate Regime

There are some advantages and disadvantages in both
exchange rate regimes.
Under fixed exchange rate regime;
Exchange rate, a variable that the public opinion can follow daily, is an effective anchor in steering expectations.
Moreover, there is strong correlation between inflation and
exchange rate.
Central Bank has no control over short-term interest rates.
Central Bank must enjoy strong international reserves and
additional reserve facilities.
Predictability of exchange rate can accelerate short-term
capital movements.
There is no flexibility against external shocks.

Monetary Policy Framework
Exchange Rate Regime

Under free floating exchange rate regime;
There is no anchor that the public opinion can follow closely. Therefore, inflation itself must be used as the most effective anchor in the inflation targeting system.
Central Bank does not need to hold high international
reserves for maintaining exchange rate stability. However, a certain amount of reserve might be needed for servicing external debts. The fact that exchange rate risk remain in market will limit short-term speculative capital movements.

Its flexibility against external shocks is rather high.
Expectations of current account deficit or surplus play an
important role in setting exchange rate. Another factor affecting the level of exchange rate is the change in Turkish lira and Foreign exchange portfolios of domestic residents due to
domestic and foreign political developments.

Monetary Policy Strategy - Assumptions
Monetary policy strategy has been set up in line with the following hypotheses.

Maintaining a well-functioning floating exchange rate regime under which price stability is the overriding objective of the monetary policy;

Continued sizeable public sector primary surplus in order to lessen public sector debt stock;

Completion of the banking sector restructuring; activation of fund transfer channel between financial sector and real sector.

Enhancing the role of private sector in the economy.

Monetary Policy Strategy – Communication
The CBRT aims to improve the mechanisms of
communication so that economic agents are in a better
position to evaluate monetary policy implementation.

So, the cost of achieving our...
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