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CENTRAL BANK OF THE REPUBLIC OF TURKEY

CENTRAL BANK OF THE REPUBLIC OF TURKEY. The CEPR/ESI 14th Annual Conference Erdem BAŞÇI Deputy Governor. October 2010. Presentation Outline. Central Banks and Financial Stability Financial Stability : Objectives Financial Stability : Instruments Economic Outlook and Risks

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CENTRAL BANK OF THE REPUBLIC OF TURKEY

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  1. CENTRAL BANK OF THE REPUBLIC OF TURKEY The CEPR/ESI 14th Annual Conference Erdem BAŞÇIDeputy Governor October 2010

  2. Presentation Outline Central Banks and Financial Stability Financial Stability: Objectives Financial Stability: Instruments Economic Outlook and Risks Exit Strategy and Thereafter 2

  3. Central Banks and Financial Stability Interest Rate Curve for Financial Stability Policy Rate rF Interest Rate Curve for Price Stability (Taylor Rule) rF > rP Occurrence of Financial Risks rP 0 Output Gap Note: Where non-interest instruments are not used 3

  4. Case Where Macroprudential Instruments areUsed Interest Rate Curve for Financial Stability Policy Rate Interest Rate Curve for Price Stability (Taylor Rule) 0 Output Gap 4

  5. Case Where Macroprudential Instruments areUsed Policy Rate Interest Rate Curve for Financial Stability Interest Rate Curve for Price Stability (Taylor Rule) 0 Output Gap 5

  6. Central Banks and Financial Stability • The additional measures we have taken recently should be evaluated as a preparation for the new world economic and financial outlook. • The main feature of this new outlook is the potential risks of overheating, excessive credit growth and emergence of asset bubbles as a result of increasing capital inflows towards reliable and dynamic emerging market economies. 6

  7. Financial Stability: Objectives Debt Ratios:Use of equity capital in higher amounts, more prudent borrowing Debt Maturities:Extending maturities of domestic and foreign borrowing and deposits FX Positions: Strengthening FX positions of public and private sectors Risk management: More effective management of exchange rate risk via instruments such as the Turkish Derivatives Exchange 7

  8. Financial Stability: Instruments Required Reserve Ratios Liquidity Management of the Central Bank Capital Adequacy Ratios Liquidity Adequacy Ratios Taxes Primary Expenditures of the Public Sector 8

  9. Liquidity Management Instruments of the Central Bank • FX Purchases • Weekly Repo Auctions • 3-Month Repo Auctions • Corridor System • […] the difference between borrowing and lending rates, or the difference between these and the policy rate (one-week repo auction rate) will be determined as an element of the operational framework of monetary policy (Exit Strategy 2010, paragraph 16.b.iii) 9

  10. Required Reserves • Liquidity Channel • Cost Channel 10

  11. Required Reserves The Use of Required Reserves as a Policy Instrument Increases Decreases 11

  12. Central Bank’s Policy Instruments Instruments for Price Stability (in the order of priority): • Short Term Interest Rates • TRY Liquidity Management • Required Reserve Ratios 12

  13. Central Bank’s Policy Instruments Instruments for Financial Stability (in the order of priority): • Required Reserve Ratios • TRY Liquidity Management • Short Term Interest Rates 13

  14. Central Bank’s Policy Instruments Frequency of Use (Higher to Lower): • TRY Liquidity Management • Short Term Interest Rates • Required Reserve Ratios 14

  15. Central Bank’s Policy Instruments Predictability (Higher to Lower): Required Reserve Ratios Short Term Interest Rates TRY Liquidity Management 15

  16. Economic Outlook and Risks Seasonally Adjusted GDP (2003 Q1 – 2010 Q2, fixed prices, 2008 Q1 = 100) Total Credit Volume*(Jan 2006 – Sept 2010, billion TL) * Total credits extended by deposit, development, investment and participationbanks along with consumer financing firms; exchange rate adjusted Source: BRSA, CBT Source: TurkStat, CBT 16

  17. Economic Outlook and Risks “ […] Should the divergence in the growth rates between domestic and external demand continue in the forthcoming period, it would be necessary to utilize other policy instruments such as reserve requirement ratios and liquidity management facilities more effectively.” (Inflation Report, July 2010) 17

  18. Policy Instruments Affecting the Current Account Deficit Primary Budget Surplus Taxes Capital Adequacy Ratios (Basel III) Liquidity Adequacy Ratios (Basel III) Required Reserve Ratios Central Bank’s Liquidity Management 18

  19. Exit Strategy and Thereafter • Inflation Report (July 2010): “[…] the measures outlined in our exit strategy to be completed to a large extent throughout the rest of the year, …” (baseline scenario) • Decision of the Monetary Policy Committee (16 September 2010): “[…] the Committee has indicated that it would be appropriate to proceed with the measures outlined in the exit strategy that were envisaged to be implemented by end-2010.” 19

  20. Exit Strategy and Thereafter • Turkishlirarequired reserve ratio is likely to be raised to 6 percent by the end of the year. • We will communicate the likely course of the required reserve ratios throughout 2011 in December 2010. 20

  21. CENTRAL BANK OF THE REPUBLIC OF TURKEY The CEPR/ESI 14th Annual Conference Erdem BAŞÇIDeputy Governor October 2010 21

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